entertainment expenses. The simple fact is that entertaining business prospects, customers or clients is (and has long been) a key component of doing business in the United States. And in many cases, alcohol is a component of that entertainment. Over the last several decades, up to 50% of business entertainment expenses have generally been deductible by taxpayers. The TCJA changes that, and completely disallows the deduction by a taxpayer of business entertainment expenses in tax years starting on or after January 1, 2018. Business entertainment can include “entertaining guests at nightclubs” as well as “meeting persona, living or family needs of individuals, such as providing meals…” It is reasonable to expect that if businesses are no longer permitted to deduct any portion of business entertainment expenses, they may begin to spend less. And if they begin to spend less on business entertainment, then those businesses that rely on business entertainment expenditures for a portion of Of course, no piece of their revenues will suffer. All of legislation is uniformly positive this is a nice way of saying that for any individual or any if you, for example, know that industry. TCJA is no exception. a lot of your product is featured Specifically of note for the in the fancy suites or sky boxes distilling community is the at the local sports arena, you adverse impact that the law should be aware of the fact may have on sales of spirits that those expensive tickets are products as a result of the no longer going to be partially elimination (in its entirety) of deductible by their corporate the ability to deduct business purchasers—and the arena (or the company managing hospitality for the arena) may not need I’VE BEEN HELD RESPONSIBLE FOR quite as much of your TAXES I KNOW NOTHING ABOUT.” product going forward if it can’t sell those tickets. JAMES BROWN qualified business income; or (ii) the greater of (a) 50% of W-2 wages paid or (b) the sum of (x) 25% of W-2 wages paid, plus (y) 2.5% times the cost of depreciable assets in the business (subject to various time limits). That’s crystal clear, right? Seriously, this is an area where most potentially implicated taxpayers will want to consult with an accountant or tax attorney to ensure that their business is set up in the most tax efficient structure possible. For some, that will mean incorporating sole proprietorships, making subchapter S elections, and paying themselves a reasonable W-2 wage. For others, making a check-the-box election such that their LLC is treated as a subchapter S corporation will be the right answer. And for a few, incorporating or making a check-the-box election such that their LLC is treated as a traditional C corporation will be the right answer. No one size is going to fit all taxpayers— some analysis will be required.
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HOME COOKING IS STILL PROBLEMATIC
THEY CAN’T As many readers will know, the FET reduction discussed above COLLECT LEGAL was originally included in the Craft TAXES FROM Beverage Modernization and Tax ILLEGAL MONEY.” Reform Act (the “Bill”) introduced AL CAPONE into Congress in each of the last several years. That bill received gradually increasing support over the years, culminating with co-sponsorship by a majority in both houses. For many years, the Bill included—tucked in among its other provisions—a provision that would have legalized the home distillation of alcohol for personal consumption. Such distilling is currently legal under the laws of several states but, like state laws relating to cannabis, those state laws are in conflict with federal law on the topic and therefore technically invalid under the Supremacy Clause of the United States Constitution. In its most recent iteration, the Bill dropped the provisions that would have permitted home distillation. And that “drop” was carried over into the TCJA. Accordingly, TCJA does not provide any manner of relief for those otherwise law-abiding citizens who might wish to try their hand at home distilling. Individuals who wish to become skilled in separating the heads, hearts and tails prior to launching a spirits business will, therefore, continue to need to develop their craft either legally (in the context of an educational program or work experience) or—as is perhaps more likely—illicitly in the context of home-based experimentation. There you have it—some of the key highlights of the TCJA that impact smaller distillers. If you’ve made it this far in the article (or any article about taxes), pat yourself on the back. You have the kind of tenacity it takes to succeed in whatever venture you choose, and if you choose to make spirits, well, I look forward to seeing your bottle on the shelf.
Brian B. DeFoe is a business lawyer at Lane Powell, where he focuses his practice on helping companies in the customer-facing industries of hospitality and retail. Brian can be reached at email@example.com, via phone at (206) 223-7948, or on Twitter @BrianBDeFoe. Visit www.hoochlaw.com for more thoughts on spirits and the laws that govern them. This is intended to be a source of general information, not an opinion or legal advice on any specific situation, and does not create an attorney-client relationship with our readers. 77
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