By Matthew Diment
For the Oregon Beer Growler
Those breweries who were trying to manage taxable income through accelerated and bonus depreciation in 2014 and 2015 may remember how frustrating it was. Congress was unable to agree to the tax extender package until mid-December of both years, making what was supposed to be an economic stimulator anything but.
For those unfamiliar with Internal Revenue Code provisions provided by code sections 179 and 168, they are intended to incentivize businesses to purchase equipment and other fixed assets, thereby pumping money into the economy. Ordinarily these types of acquisitions are capitalized and depreciated using a prescribed method and life. Typically equipment will take five or seven years to recoup the expense on a tax basis. Code section 179 allows for up to $500,000 of qualifying asset purchases to be expensed immediately. The benefit phases out once a business purchases more than $2 million in assets. Code section 168 or bonus depreciation allows for a business to deduct 50 percent of any qualifying asset purchased new to be expensed immediately. The remaining 50 percent continues to depreciate under the old method.
In 2014 and 2015, these and other tax provisions that were set to expire got extensions but not until mid-December. This made it a gamble for businesses to count on this additional depreciation as well as other provisions which could be beneficial. Many breweries put off buying equipment as there were concerns that cash on hand would be needed to pay income taxes rather than investing in the brewery. The difference in the 2015 extension was that Congress had the foresight to extend these provisions for more than one year. Additionally, some permanent changes were made to the tax code. Breweries can better manage their expansion strategies knowing what the tax implications will be.
While there were a number of provisions which were extended, there are some that have very real impacts for breweries. The aforementioned depreciation provisions were both extended. The section 179 expensing amount was made permanent. The limit for 2016 will remain at $500,000, and starting in 2017 it will be indexed for inflation as will the $2 million phase-out limitation. The section 168 bonus depreciation was extended through 2019. The amount available for immediate deduction will be 50 percent in 2016 and 2017, 40 percent in 2018 and 30 percent in 2019.
Other extended provisions that may be beneficial to breweries were passed as well. The research and development credit was made permanent. This credit is beneficial if breweries track expenses for product and process improvements. The work opportunity tax credit was also made permanent. This provision gives employers a tax credit for hiring veterans and certain hard-to-employ individuals. Additionally, if there are any breweries which were formally C corporations and have converted to S status, the especially punitive built-in gains tax period has been permanently changed from 10 to five years.
Another tax change made during 2015 was unrelated to the tax extender but was no less beneficial. Previously, there was a safe harbor threshold for expensing asset purchases below $500. This has been raised to $2,500, so any assets or repairs made which are under $2,500 may not need to be capitalized. It’s best to have a written document related to your capitalization policy, no matter your internal threshold.
This is a brief overview of the extended provisions. For a deeper understanding of how they affect your brewery, contact your tax professional.
Cheers to Congress for helping us make more beer!
Matthew Diment is of Kernutt Stokes, CPAs and Consultants. Matthew and a team of professionals serve the craft brewing industry. For questions or more information, contact Matthew at 541-687-1170 or email@example.com.