You may have noticed that the nation’s capital of Washington, D.C. is almost always a hub of activity, even when it seems that not a lot is getting done.
Most recently, the “Big Six” (Treasury Secretary Steven Mnuchin, National Economic Advisor Gary Cohn, Speaker Paul Ryan, House Ways and Means Chairman Kevin Brady, Senate Majority Leader Mitch McConnell, and Senate Finance Committee Chairman Orrin Hatch) have unveiled an initial framework for tax reform that, for the first time, starts to put real meat on the bone for how Congressional Republicans and the Trump Administration would reform the Internal Revenue Code.
In this post, I would like to break down a few of the ways this could potentially impact small and independent craft brewers (and potentially our supplier companies). The following is my (non-legally binding) interpretation of how the current plan could impact your brewery. This is not legal advice. Consult your attorney or tax adviser, who are best equipped to advise you regarding your brewery’s specific circumstances.
Lower rates for pass-through businesses
If your brewery is organized as a sole proprietorship, partnership, limited liability corporation (LLC), or S corporation, you are what is known as a “pass-through entity.” As a result, you do not pay corporate income taxes. Rather, the income from your business passes through to you, and you pay individual marginal income taxes on such income. Thus, if you’re a quite successful pass-through, it is conceivable that you pay the highest marginal income tax rate (39.6 percent). The Republicans’ tax reform framework contains some good news for pass-throughs: It would establish a 25 percent income tax rate for pass-throughs, while lowering the corporate income tax rate from 35 percent to 20 percent. This new rate is intended to keep pass-through entities competitive with businesses organized as C corporations.
How would this impact brewers? If a brewery owner’s business is incorporated as a pass-through and it currently pays higher than a 25 percent rate on its income tax, it will receive tax savings. For reference, the maximum income for a 25 percent rate in tax year 2017 will be $91,900 for individuals and $153,100 for married couples filing jointly. So if your income was above that, the tax reform framework, if enacted, would effectively cut your tax bill.
Reduction in tax rate structure for corporations
If your brewery is organized as a traditional C corporation, you are a legal entity that is separate and distinct from your owners. Currently corporate income tax is imposed at graduated rates. The lower rate brackets apply to lower rates of income when compared to higher tax brackets that coincide with higher rates of taxable income.
How would this impact brewers? If your brewery is organized as a corporation and your taxable income exceeds $335,000, your income is subject to tax at 34 percent or 35 percent. The Republicans’ tax reform plan would reduce the corporate tax rate to 20 percent regardless of the maximum income.
Immediate expensing of equipment
Under the current tax system, capital investments like buildings, vehicles, and brewing equipment are treated as “depreciable assets,” and as such can be deducted from income at increasing levels over a fixed term of five, seven, or 39 years, according to depreciation schedules set by the IRS. The Republicans’ tax reform plan would allow for immediate depreciation of capital assets for the first five years after their purchase.
How would this impact brewers? Immediate depreciation of capital investments could let brewers receive a tax break on capital investments in the same year they are made rather than waiting to receive the tax benefits over several years. Breweries that are organized as corporations could be impacted by this because, under the plan, deductions for net interest expense incurred by C corporations will be partially limited. The authors of the tax reform framework—the Big Six—have not stated whether pass-through entities’ interest expensing would be limited.
(MORE: U.S. Brewery Locator)
This is just the initial framework of a tax plan. No actual legislation has been introduced as of this writing. The final legislation will need to go through mark-ups in the Finance and Ways and Means committees and pass the full House and Senate. There is always the chance that the above provisions could be removed or altered and new ones could be added. The bill also could impact existing tax breaks and result in cuts for some government agencies.
The Brewers Association will continue to monitor tax reform as it progresses and keep craft breweries informed and up-to-date about how it could impact their businesses. But the bottom line is that some of these provisions, if enacted, could benefit small brewers. If you have any questions, please don’t hesitate to reach out.