If you have a small distillery, your bond and excise tax requirements may change this year as a result of the PATH Act. Signed into law by president Obama on December 18, 2015, the 233-page Protecting Americans from Tax Hikes Act includes a wide range of tax reductions for families and businesses, including distillers.
Beginning January 1, 2017, distilleries that paid less than $1,000 in taxes the previous year and expect to pay less than $1,000 for the current year will now be allowed to pay those taxes yearly, rather than quarterly. Distilleries that expect to pay more than $1,000, but less than $50,000, will still be able to pay their taxes quarterly.
In addition, distilleries (and other alcohol beverage producers like breweries) that paid less than $50,000 in excise taxes the previous year and expect to pay less than $50,000 in the current year will no longer have to hold a bond for warehousing or withdrawal.
For small distilleries who qualify for the bond exemption, the potential savings from dropping their bonds may seem significant in relation to their total yearly revenue – but is the risk of going bond-less worth it?
Brian DeFoe, an Artisan Spirit Magazine contributor and Lane Powell business attorney who regularly works with distillers, doesn’t think so.
“If you decide to forgo the bond, it doesn’t change your obligation under the law,” he said, telling that excise taxes will come due either way. “It just means you don’t have a safety net.”
If a distiller has always been able to pay their excise taxes on time and expects to maintain that schedule in the future, dropping their bond may seem like a guaranteed savings. But the distilling industry offers few guarantees. If an employee gets injured, a still gets damaged, or a market slows down, the revenue that distiller counted on may not be there. And if the distillery is small enough to qualify for the bond exemption, the odds of having enough spare cash to make the tax payment aren’t good.
Further, even if the distiller does believe they have the funds, if TTB finds that proof gallons were miscalculated the amount due could rise significantly (in addition to possible fines), and the payment will still be due on the 14th.
Bonds are meant to cover unpaid excise tax, and without one there is no buffer between the investors and the IRS. So what happens if a distiller drops their bond and cannot come up with the money? They, and likely their investors, are personally liable.
Due to a provision in the Internal Revenue Code (Title 26, Subsection 5005), everyone who owns more than 10 percent of the distillery stock is liable for the taxes, regardless of the business structure (LLC, etc.). Hypothetically, if an investor wrote a check to the distillery and the funds coincidentally amounted to 10.01 percent ownership, they would be liable for unpaid excise tax. That’s something most investors are probably not aware of.
“In our legal system, usually if you’re an equity owner, if you’re a shareholder, in most cases you can’t lose more than you put into the company,” DeFoe explained. “Here they can deliver a bill to you which may be over and above the amount of your investment.”
While some distillers will certainly drop their bonds due to the PATH Act changes, they need to be cognizant of the risks they subject themselves and their investors to by doing so. DeFoe covers the topic in more detail here in his blog, hoochlaw.com.
For distillers who do wish to go bond-less, TTB recommends using their Permits Online system. New applicants will be able to submit their applications without bonds after January 1st. Existing distillers that believe they qualify for the exemption must provide proof and use Permits Online or the appropriate paperwork to amend their permits. All 2016 taxes must be paid in order to qualify as owing less than $50,000 in the previous year.
For more information on the PATH Act changes, TTB published this guidance.
For reference, here are the USC subsections affected: 5061 (taxes) and 5551 (bonds).
Section 332 of the PATH Act contains the specific changes.
Wondering how to fill out a bond? Check out this Artisan Spirit article.