Every business located in the US (or Puerto Rico) performing manufacturing activities (not just distillers, brewers, and vintners) should consider the 9% IRC § 199 deduction. The IRC § 199 Domestic Production Activities Deduction has a complex set of requirements but in general, it's a 9% tax deduction for taxable income derived from qualified domestic production activities.
Sec. 199 & the Distilling, Brewing, and Vinting Industries
You'll get no argument that these industries manufacture a product, however, your CPA might tell you that they are not eligible because IRC § 199 does specifically excludes preparation of food and beverages for sale at retail…
However, this exclusion is for restaurants (or bars) that assemble products behind the counter and sell them to you on site. Sales from burgers, mixed drinks, etc… ARE NOT eligible. The manufacturing, blending, and finishing of spirits, beer and wine that go into a vessel with a label for wholesale ARE eligible production activities. The IRS recognizes that some establishments engage in both wholesale and retail activities.
Furthermore, here has been some debate about the eligibility of assembling pre-packaged goods into a new product. The courts have recently established case law (Dean & Precision Dose cases) with the IRS that essentially determined a transformation of a product's demand does, in fact, qualify for the deduction. This means that blending or creating your own products from GNS or other purchased bulk spirits (pre-assembled goods) qualifies the same as producing a product from scratch.
IRC § 199 allows a business with “qualified production activities” to take a deduction equal to 9% of the lesser of: (1) the qualified production activities income (QPAI) of the taxpayer for the tax year or (2) taxable income (determined without regard to Section 199) for the tax year. The tax deduction is further limited to 50% of the W-2 wages of the employer for the tax year.
Qualified production activities income is defined as income attributable to certain manufacturing, production, growing, or extracting (MPGE) activities from qualifying production property (QPP).
QPAI is the excess of domestic production gross receipts (DPGR) over the sum of:
(1) The cost of goods sold that are allocable to such receipts, and
(2) Other expenses, losses, or deductions (other than the deduction under Section 199) that are properly allocable to such receipts.
The IRC § 199 deduction is allowed for both the regular tax and the alternative minimum tax for individuals; C corporations; farming cooperatives; and estates, trusts and their beneficiaries. The deduction is allowed to partners and the owners of S corporations (not to partnerships or the S corporations themselves).
The deduction may also affect state taxes, as of 2013, 25 states allowed the deduction.
Navigating the complex requirements of IRC § 199 can be daunting but advantageous in the end. If you have taxable income and produce, blend, or finish spirits, beer or wine a 9% deduction in taxes can be the difference between purchasing a new bottling line this year or not. By having an expert prepare a sustainable analysis and report to claim IRC § 199 on this year or past open years tax returns is the lowest risk option, this deduction does NOT increase your risk for an audit if done correctly. The next step is asking for a complementary benefit and fee analysis.
For more information, questions, and comments please contact Aaron Coffeen or your ETS director:
Aaron Roy Coffeen MLA, LEED Green Associate