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Most distillers are aware of the Craft Producer tax break on the first 100,000 PGs/yr of product removed in a calendar year. When the tax break was first announced in 2018, there were some loopholes that allowed producers to sometimes take advantage of multiple 100,000 PGs/yr allotments. Those loopholes have largely been closed through subsequent regulation, and this blog post will attempt to summarize the current state of regulations.
Firstly, why do we care? We can put a number on it.
100,000 PGs @ $13.50 / PG = $1,350,000
100,000 PGs @ $2.70 / PG = $270,000
$1,350,000 – $270,000 = $1,080,000
That’s right – the value of the tax break is almost exactly $1 million per calendar year, if you hit 100,000 PGs of removals. Who wouldn’t want to save a cool million on their tax bill each year?
Availing yourself of this rate reduction should be carried out with care. There are some “gotchas” that serve to disqualify you from taking a reduced rate when you otherwise might think you are entitled.
Gotcha #1 – Brand / License / Franchise Basis (“Single Taxpayer”)
Let’s say DSP #1 has a successful Vodka brand that they produce and bottle in-house. And let’s say somebody starts up a new distillery, DSP #2, and offers to produce and bottle the successful Vodka brand under a co-packing agreement, with the intent to utilize DSP #2’s 100,000 PG/yr allotment.
While this arrangement itself is legal at the federal level, DSP #2 is not actually allowed to take the reduced rate on the co-packed product. These circumstances invoke “Single Taxpayer” regulations which require you to consider the two DSPs as if they were a single taxpayer for purposes of the 100,000 PG/yr entitlement. The practical application of this regulation is: no matter how many DSPs are involved, and no matter who owns them, each brand is limited to one 100,000 PG/year allotment, at most.
Gotcha #2 – Controlled Group
This “gotcha” is even more obtuse. Each “controlled group” is entitled to only one 100,000 PG/yr tax break. In other words, multiple DSPs that have common/overlapping ownership cannot avail themselves of 100,000 PGs per DSP. Instead, a single 100,000 PG allotment must be apportioned among the DSPs that the group owns.
At this point, you’re probably wondering what a “controlled group” is. The definition refers to US Code 1563, but instructs you to replace the words “at least 80%” with “more than 50%”. Applying this definition to your business structure is not always esay (for example, stock options can be considered stock under this definition). If you don’t get it right, TTB might come after you for back taxes, interest and penalties (see this recent OIC for an example).
