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How the Tax Cuts and Jobs Act Affects Meaderies

By January 4, 2018October 28th, 2021No Comments

As you may have heard, Congress recently did something. And, regardless of where you fall on the political spectrum, or your greater feelings about economics, this law benefits meaderies and their owners in a number of powerful ways.

The Tax Cuts and Jobs Act included some language based on a bill previously known as the Craft Beverage Modernization and Tax Reform Act, which was influenced by the hard work over the past few years by members of the AMMA board. Among other things, it includes:

  • The first time we’ve seen “mead” included as a category in federal legislation
  • Significant tax cuts for wineries and meaderies
  • Benefits for small business owners

Q: First things first: This bill defines mead?

A: Not really. While it’s cool to see the word mead used, and we should be very happy about that as a marker of our growing place in the market, this bill defines “mead” only for the purposes of providing a tax break on a specific kind of mead.

That tax break is to remove the “bubble tax” on carbonated, low-abv meads without fruit.

Essentially, if you make a traditional mead with no fruit below 8.5% ABV, you can now carbonate it to your heart’s content (up to .64 g/100ml), without paying a greater tax or forfeiting your small producer tax credit.

Those meads can contain spices or hops or other non-fermented flavorings, but not fruit.

Q: What’s this about an excise tax cut?

A: What actually happened is that the law expanded the benefits of the small producer tax credit.Before this law (from the TTB):

If production is 150,000 gallons or less, the credit is $.90 on the first 100,000 gallons (other than sparkling) taxably removed each year. If production is more than 150,000 and not more than 250,000, the credit is reduced by 1% for every 1,000 gallons produced in excess of 150,000

As of 2018 (from WineAmerica President Jim Trezise):

There’s a credit of $1.00 on each of the first 30,000 gallons produced, making the effective tax rate 7 cents instead. For the next 100,000 gallons, the credit is 90 cents (meaning a 17 cents effective rate), and then 53.5 cents on the next 620,000 gallons (i.e., 53.5 cents effective rate), with a cap at 750,000 gallons and maximum potential savings of $451,700. Every gallon above 750,000 is subject to the full $1.07 rate.

One other thing is that it raised the limit on lower tax rates from 14% to 16%.

Your base excise tax rate used to go from $1.07/gal to $1.57/gal at 14%. Now it does that at 16%, which actually benefits us more than most wineries, given how many sack meads can be easily formulated to 15.9% ABV.

So, I’ve put together this chart to help:

Meadery Production Old, pre-cut tax rate w/ credit (<14% ABV) New tax rate w/ credit  (<16% ABV)
<30,000 gal (approx. 967 bbl) $0.17/gal $.07/gal
30,001 gal – 130,000 gal (4193 bbl) $0.17/gal $.17/gal
130,001 gal – 750,000 gal (23,226 bbl) changed every 1000 gal $0.535/gal
>750,000 gal $1.07 $1.07

Remember, every meadery gets these benefits sequentially. Even if you make 700,000 gallons a year, you still pay the $.07/gal on your first 30k gal.

Q: What are the other benefits for us?

A: The Act also affects small business owners in a number of ways.

If you are a pass-through entity, such as a Sole Proprietor, an LLC or an S-Corp:

  • Your pass-through income is now taxed at 37% (down from 39.6%) and you can now deduct 20% of your pass-through income if you make less than $157,000 (double for a couple
  • It’s actually even more complicated than that, because that’s what happens when we set out to “simplify the tax code,” and you should talk to your CPA about it.

If you are a C-Corp, you’re getting a massive tax cut next year:

  • Corporate tax rate is now 21%, down from 35%, and there’s no alternative minimum tax.

Immediate expensing

  • Previously, when you bought equipment, you had to depreciate it over a schedule. Now, you’ll be able to fully expense that equipment fully within the first five years, limiting your tax liability sooner rather than later.

Q: Is there more?

A: Oh, there’s a lot more. Congress infamously had no idea what was in this bill as lawmakers scratched marginalia when it passed, so I imagine we’ll be learning about its effects for some time. But these are the big hits for mead. Talk to your accountant about planning and strategy.

I know a number of meaderies also make ciders, so, from Michelle McGrath at US Association of Cider Makers:

For hard cider, the bill will save cideries money through a similar excise tax credit mechanism. While the federal excise tax on hard cider will remain unchanged at $0.226 per gallon, there will be a new tax credit of $0.062 on the first 30,000 gallons produced, making the effective tax rate $0.164 per gallon. The tax credit on the next 100,000 gallons produced is $0.056, and between 130,000 and 750,000 gallons produced the tax credit will be $0.033.”