Originally published on Forbes.com.
I’m continuing a tour through the Joint Committee report on the Tax Cuts and Jobs Act mainly looking for the humorous bits. Rather than title this piece Part 3 , I am focusing on one of the primary themes of the tail end of a rather long document. That would be the provisions that will make America great again by making it more alcoholic. In the act itself and the Joint Explanatory Statement of the Committee of Conference, the word “beer” occurs 69 times. And you thought it wasn’t going to be a fun read. There are other provisions to discuss first but to get you in the spirit of Tax Cuts and Jobs Act, listen to Toby Keith and Willie Nelson.
If you read this it might help you follow along. To catch up you need to skip to page 500 and then start scrolling down until you see the pagination starting again and then go to page 339 which is where we left off. And as I wrote in the last two pieces, if you want a solid summary of the details as they relate to regular people check in with the Tax Girl – Kelly Phillips Erb. This is more of an idiosyncratic tour for the fun of it.
Under The Midnight Sun
Section 13821 of the act is titled Modification of Tax Treatment of Alaska Native Corporations and Settlement Trust. It looks positive for them but I am not sure. I hope it is, because one of my principles in studying tax matters is to always root for the indigenous peoples, along with disabled veterans and widows.
Aliens And S Corporations
Not just anybody or anything can be the shareholder of an S corporation. Not other corporations, Not partnerships. Only certain kinds of trusts. And the big no-no is nonresident aliens. One type of trust that can hold S corporation stock is an Electing Small Business Trust (ESBT). The part of the ESBT that holds S corporation stock is considered to be a separate trust that pays tax at the highest individual rate. Then it can make distributions (or not) to the beneficiaries. The beneficiaries have to be individuals, estates or charitable organizations. Nonresident aliens can be potential beneficiaries but not current beneficiaries. The conference bill will change that. Nonresident aliens will be allowed to be current beneficiaries of ESBTs.
I’m trying to figure out whether this is something good, bad or indifferent. It does seem that it would facilitate investment of foreign capital in the US. It would also allow some of the heirs of an S corporation to expatriate without blowing up the S election. The provision was something added by the Senate.
The Whiskey Rebellion
Given that our President totally avoids alcoholic drinks, it is truly amazing how much his signature tax legislation does to promote alcohol consumption – or production any way. There are provisions that will help the makers of beer,
whiskey,
and wine.
First comes an accounting change in what is called the UNICAP rules. The UNICAP rules require you to add certain expenses to the cost of inventory rather than write them off immediately. It is hard on companies that have things that take a long time to prepare for sale. And of course whiskey and wine famously have to age a long time before they are sold. Well, the good stuff anyway. So the first break is to not require the brewers, distillers and vintners to capitalize interest with respect to product that is aging. But there is more.
Alcoholic beverages are subject to excise taxes. And those are going down. The big breweries will now pay $16 per barrel on the first six million barrels produced or imported rather than $18. You could look at that as giving all the big brewers and importers $12 million bucks if you are skeptical that the savings will be passed on to Sam Sixpack. If you want to so the math, there are 31 gallons in a barrel and 0.5625 gallons in a six-pack. Different story for your craft brewers. They pay seven bucks a barrel on the first 60,000 and that will be cut in half.
The wine excise cuts are more complicated. I mean what do you expect. It’s wine.
The Senate amendment modifies the credit against the wine excise tax for small domestic producers, by removing the 250,000 wine gallon domestic production limitation (and thus making the credit available for all wine producers and importers). Additionally, under the provision, sparkling wine producers and importers are now eligible for the credit.
There’s more, but it is all good for the cause of wine consumption. And something about a better rate for mead, which I take as an indication of continuing Viking influence.
And then there are the distilled spirits now taxed at $13.50 per proof gallon, whatever that is. The new deal is:
The Senate amendment institutes a tiered rate for distilled spirits. The rate of tax is lowered to $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits, $13.34 for all proof gallons in excess of that amount but below 22,130,000 proof gallons, and $13.50 for amounts thereafter. The provision contains rules so as to prevent members of the same controlled group from receiving the lower rate on more than 100,000 proof gallons.
The alcoholic provisions all came from the Senate. I’ve been so absorbed in studying the bill that I have not been able to devote much time to reports of the sausage making. According to this story Justin Kendall in Brewbound gives credit to Senators Roy Blunt and Rob Portman. The thing about the political dynamics of the bill is that any Republican Senator willing to hold his or her breath till turning blue can get a puppy or a case of beer or something to bring them around. So that’s probably the way it went. My theory that Senators saw the House Bill and all decided to go out and get drunk doesn’t hold that much water, but it is entertaining.
One of my best friends from high school tweeted about these provisions that you gotta love that if you are Irish. Ethnic stereotypes are a really bad thing regardless of any statistical basis of this or that group having more than its share of this or that vice or virtue. What is really bad is when the group rather than objecting to a bad characterization embraces it. You will find that most groups who do this satisfy themselves by joking about themselves – but not us. We have to take a religious holiday and dedicate it to binge drinking. That is really bad. So please support Sober St. Patrick’s Day.
Whiskey Tango Foxtrot
Near the very end right before the scoring, there is the Tax Complexity Analysis (Page 554 of the second pagination sequence). It includes these gems on the Qualified Business Income break.
It is estimated that the provision will affect over ten percent of small business tax returns.
I think that 10 percent might be a little off. Maybe by 89% or so.
It is not anticipated that individuals will need to keep additional records due to the provision. It should not result in an increase in disputes with the IRS, nor will regulatory guidance be necessary to implement this provision.
The only way that it will not result in an increase in disputes with the IRS is if the IRS does not do any enforcement as guys like me plot to transform every possible dollar of income that can’t be a capital gain into QBI.
The provision should not increase the tax preparation costs for most individuals.
Not if they have accountants who know how to bill.
Summary
When I look at the evolution of the Tax Cuts and Jobs Act, I need to go back to the words of Toby Keith and Scott Emerick as I contemplate our Congress.
Grandpappy told my pappy, back in my day, son
A man had to answer for the wicked that he done