States don’t produce anywhere near 100,000 proof gallons in a year. In fact, according to the ACSA’s Craft Spirits Data Project, approximately 2% of craft producers remove in excess of 100,000 proof gallons from bond on an annual basis. That 2% group, which consists of distillers that remove at least 100,000 proof gallons but less than 750,000 proof gallons annually, accounts for roughly 57% of all craft spirits sold in the United States. Notably, 92% of U.S. craft producers remove less than 10,000 proof gallons from bond on an annual basis. Extrapolating from the data, we should expect that roughly 98% of all spirits producers in the United States will end up paying $2.70 per proof gallon in FET. There is of course a catch— in that the reduction may be short-lived. Specifically, the TCJA only provides this relief for FET obligations incurred before December 31, 2019. After that date, unless Congress acts to extend the relief, FET will revert back to $13.50 per proof gallon starting with the very first spirit coming off the still. So how should distillers plan for the reversion of FET to preTCJA levels? If you’re asking the question, you’re already ahead of the game, as the biggest danger here may be for distillers to become accustomed to the reduction in FET and overextend themselves as a result. At the same time, however, this (extremely) temporary tax relief—when combined with other effects of the TCJA— may provide distillers with an opportunity to quickly expand production and, as a result, take advantage of other efficiencies to reduce their cost structures. WWW.ART ISANSP IRITMAG.COM
CORPORATE INCOME TAXES ARE REDUCED FOR MOST AND INCREASED FOR SOME
I’M PROUD TO PAY TAXES IN THE UNITED STATES; THE ONLY THING IS, I COULD BE JUST AS PROUD FOR HALF THE MONEY.”
Immediately before passage of the TCJA, by some estimations the United States had the highest ARTHUR GODFREY corporate income tax rate in the industrialized world. In fact, according to Tax Foundation, the “nation’s leading independent tax policy research organization,” the United States had the fourth highest corporate income tax rate in the entire world—at 38.91% (comprised of the highest federal statutory rate of 35% plus the average of the corporate income taxes levied by the states). In their estimation, this put the United States behind only the United Arab Emirates, Comoros and Puerto Rico. It should be noted that Tax Foundation isn’t entirely without bias here, and their focus on marginal tax rates as opposed to effective tax rates might be characterized as somewhat misleading. Nevertheless, their broader point is reasonably accurate; U.S. corporate income tax rates have historically been higher than similar tax rates imposed by most other countries. With the passage of TCJA, the federal corporate income tax rate is now pegged at a flat rate of 21% for all tax years beginning on or after January 1, 2018. For many corporations, this will mean a reduction in rates. [Note: Prior to TCJA those corporations with taxable income between $0 and $50,000 previously paid tax at the rate of 15%. Therefore, for those corporations generating the least amount of profit, the 21% rate is actually a rate increase.] In addition, the TCJA eliminates the corporate alternative minimum tax—a 20% hit previously applicable to some corporations with average annual gross receipts of at least $7.5 million in each of the three preceding tax years. Together, these changes mean that most businesses that have elected to be taxed as traditional corporations (i.e., not sub-chapter S corporations or businesses that have elected to be taxed as partnerships) will see a reduction in their federal income tax liability. But if your distillery is operating as one of the unlucky few that is taxed as a traditional corporation while generating less than $50,000 in taxable income, this may be a good time to chat with your accountant about changing your approach—especially given the 20% deduction available on flow-through income under new Internal Revenue Code Section 199A, discussed below in the context of entity selection.
NOT ALL INTEREST IS EQUAL
TCJA ushers in some significant changes in THE WAGES OF SIN ARE DEATH, BUT BY THE the treatment of interest paid by a business with TIME TAXES ARE TAKEN OUT, IT’S JUST SORT respect to debt. Under prior law, this interest was generally deductible when computing the OF A TIRED FEELING.” business’ taxable income (subject—of course—to PAULA POUNDSTONE a number of exceptions and limitations). However, under the TCJA, for tax years beginning on or after January 1, 2018, large businesses’ deductions for net interest expense are limited to 30% of the business’ adjusted taxable income. Smaller businesses—those with average annual gross receipt of less than $25 million—are not subject to this limitation. [Note: Those taxpayers who are occasionally frustrated at the disconnect between the concepts of financial accounting and tax accounting should be advised that, for tax years 2018 through 2021, adjusted taxable income will be computed without regard to deductions allowable for depreciation and amortization—meaning that a business’ adjusted taxable income in those periods will be roughly equal to a metric commonly used to analyze business performance—EBITDA (earnings before interest, tax, depreciation and amortization).] To the extent that your business can’t manage to deduct all business interest in the year it is incurred, it will be treated as business interest paid or accrued in the succeeding tax year and can be carried forward in this fashion indefinitely. In other words, if your business eventually stops incurring business interest (say, for example, your business pays off the loan it took out to fund the build out of your distillery), then you should eventually be able to use all of your business interest deductions to offset taxable income.
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