As organizations look ahead to year-end tax planning, there are a number of opportunities available to many taxpayers including those operating within the adult beverage industry which encompasses wine, beer, spirits such as bourbon, whiskey, gin, and vodka, and other alcoholic beverages such as THC beverages. The enactment of the One Big Beautiful Bill Act (OBBB) made significant modifications to many provisions within the tax code, many of which can have a notable impact on companies operating within the adult beverage industry. Strategic tax planning around the legislative updates can help companies maximize opportunities while also mitigating risk. Below is a list of some planning considerations that may help wineries, distilleries, breweries, and other companies operating in the adult beverage industry to take advantage of the recent changes.

Reinstatement of 100% bonus depreciation

The OBBB permanently reinstated bonus depreciation pursuant to Internal Revenue Code (IRC) Section 168(k) to 100% for certain business property acquired after Jan. 19, 2025. Prior to the passage of OBBB, bonus depreciation was phasing down annually for property acquired before 2027, with a bonus rate of 40% for property acquired in 2025, and 20% for property acquired in 2026. Under the OBBB, taxpayers must pay close attention to the requirements surrounding the determination of the proper acquisition date, including whether a written binding contract was executed and construction commenced.

Planning tip: Taxpayers should carefully evaluate the acquisition date for eligible property to ensure the appropriate bonus depreciation rate is applied. Due to the often capital-intense nature of the adult beverage industry, taxpayers within this space should consider the impact of 100% bonus depreciation on long-term capital budgeting. Taxpayers should also be mindful of any significant capital investments made of items such as machinery and equipment in the fourth quarter, which may result in a requirement to apply the mid-quarter convention for depreciation purposes. Cost segregation studies are still a valuable tool to maximize depreciation, specifically 100% bonus depreciation. Also, many states decouple from bonus depreciation, so taxpayers need to consider state exposure when evaluating bonus depreciation and/or Section 179 (discussed below).

Introduction of Qualified Production Property (QPP)

The OBBB established IRC Section 168(n), creating a new category of property entitled Qualified Production Property (QPP). Under the OBBB, QPP is eligible for a 100% first-year depreciation deduction in the year that the property is placed in service. To be eligible, QPP must be nonresidential real property that is used as an integral part of a qualified production activity, which includes the manufacturing, production (limited to agricultural and chemical production only), or refining of tangible personal property other than food or beverage products prepared in the same building as a retail outlet that sells those products. Additionally, construction of the property must start between Jan. 20, 2025 and Dec. 31, 2029, and the property must be placed in service within the U.S. before Jan. 1, 2031. Portions of the property used for functions unrelated to qualified activity (i.e., administrative offices, parking lots, sales areas, R&D, or engineering space) are not eligible for the QPP deduction. Prior to the OBBB, property of a similar nature was generally depreciated over a 39-year life. Accordingly, the OBBB’s creation of a 100% immediate deduction for similar property is a significant change from prior law, resulting in an opportunity for additional tax savings.

Planning tip: Taxpayers within the adult beverage industry should evaluate whether the construction of any new facilities used in the manufacturing process may be eligible for the QPP deduction under Section 168(n). Taxpayers should consider a cost segregation study to identify the portions of the facility that are eligible versus those that are ineligible.

Section 179 expensing

In addition to revisions related to bonus deprecation, the OBBB also increased the expensing limits for the Section 179 provision allowing for an immediate deduction of certain property including tangible personal property, qualified improvement property, and software. For property placed in service during tax years beginning after Dec. 31, 2024, the expensing limit was increased to $2,500,000 and the phase-down threshold was increased to $4,000,000. Both the expensing limit and the phasedown threshold will be indexed to inflation annually. 

Planning tip: Taxpayers within the adult beverage industry should optimize the relationship between 100% bonus depreciation under Section 168(k) and the 100% expensing deduction under Section 179 to maximize available depreciation deductions. 

Section 199A – Qualified Business Income Deduction

Section 199A allows eligible self-employed and small business owners to deduct up to 20% of their qualified business income. This deduction is available to individuals, partnerships, S-Corporations, and some trusts and estates with qualified business income. It is taken on an owner’s individual tax return and can be claimed even if the taxpayer uses the standard deduction instead of itemizing. C corporations are not eligible. 

Planning tip: Taxpayers within the adult beverage industry should evaluate the provisions of Section 199A and look to ways to fully take advantage of this deduction by maximizing their qualified property basis and managing their W-2 wages due to this deduction being capped at the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. 

Research and Experimental (R&E) expenses pursuant to Section 174

In recent years, taxpayers engaged in research activities have been required to capitalize and amortize such costs following the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. The OBBB sought to reverse the capitalization requirement by revising Section 174 back to its pre-TCJA status of deducting research and experimentation costs as they are paid or incurred. The deductibility of research costs applies to tax years beginning after Dec. 31, 2024. However, organizations that meet the definition of a small business taxpayer could apply OBBB’s deductibility revision retroactively back to 2022, thereby providing a tax savings opportunity. In addition, those that do not meet the definition of a small business taxpayer are able to recover the unamortized balances of previously capitalized research costs beginning in 2025. Recent guidance issued by Treasury have provided both large and small business taxpayers with the procedures necessary to benefit from the OBBB revisions. 

Planning tip: Evaluate whether any activities performed constitute R&E costs pursuant to Section 174. To the extent that an R&E activity is performed, consider the deductibility of such costs in 2025 and prospectively. In addition, if the R&E activities are performed in the U.S., the costs may also be eligible for the research credit under Section 41. To the extent that wineries, distilleries, and breweries have already capitalized Section 174 costs since 2022, review the recent guidance to identify the steps necessary to recover or deduct such costs. Also, consider moving any foreign-based research activities to the U.S. to take advantage of the immediate deductibility and credit opportunities.

Research and Development Tax Credit (R&D)

Businesses and/or taxpayers in the adult beverage industry should be aware that the federal R&D Tax Credit can provide valuable tax savings – either against income tax or payroll tax – for a wide range of process optimization activities common in the adult beverages industry. Qualifying efforts include developing or improving fermentation and distillation processes to enhance shelf life, creating new product formulations, and experimenting with ingredient mixing techniques. Additionally, investments in automation, bottling, and packaging improvements, as well as prototype batch development and preservative enhancements, may also qualify. These activities often involve technical uncertainty and iterative testing, which are key criteria for R&D credit eligibility. By identifying and documenting these efforts, taxpayers in the adult beverage industry can unlock substantial financial benefits while continuing to refine and grow their operations.

Planning tip: Taxpayers in the adult beverage industry should review their day-to-day operations to determine whether they qualify for the R&D credit or have opportunities to expand their current R&D claims. 

Qualified Small Business Stock 

Prior to OBBB, Section 1202 allowed noncorporate taxpayers that hold qualified small business stock to exclude portions of the gain realized on the sale of the stock if such stock was held for more than five years. The OBBB revised and expanded the gain exclusions under Section 1202 in a number of ways, such as, but not limited to: adding partial gain exclusions for stock held less than five years, increasing the gross assets limitation ceiling, and increasing the taxpayer exclusion ceiling. The revisions made to Section 1202 via the OBBB opens the door for more taxpayers to take advantage of the opportunity. 

Planning tip: Taxpayers in the adult beverage industry should evaluate criteria and limitations associated with Section 1202 and consider issuing qualifying small business stock if already a C-corporation or consider structural or organizational changes if set up as a partnership and/or S-Corporation in order to take advantage of the potential gain exclusion upon selling or exiting the business. 

Key takeaways

As taxpayers within the adult beverage industries begin year-end planning discussions, they should be mindful of the various tax legislative updates implemented in recent months. With the ever-changing landscape of tax policy, a thorough review of the strategies available to businesses operating in this space may lead to additional tax-savings opportunities. Many of the recent tax policy updates via the enactment of OBBB are directly relevant to businesses within the beverage-production marketplace and should be considered carefully.