Brewery and Distillery Accounting: TTB Excise and Costing

Brewery accounting works by combining standard financial accounting with two specialized layers: federal excise tax assessed per barrel or proof gallon, and production-level cost accounting tied to individual batches. Distillery accounting follows the same structure, with both trades governed by the Alcohol and Tobacco Tax and Trade Bureau (TTB). A craft brewer producing 5,000 barrels per year pays different federal rates than one producing 100,000, and a distillery removing spirits from bond owes excise tax the moment product leaves its bonded premises. Getting these mechanics right protects cash flow and keeps the business in good standing with regulators.

What Makes Brewery Accounting Different

Standard business accounting tracks revenue, expenses, and assets. Brewery accounting does all of that and adds a layer of regulated excise tax that sits between production and sale. Because beer, spirits, and other beverage alcohol products are federally taxed commodities, every brewery and distillery must hold a TTB permit, maintain detailed production records, and file excise tax returns on a schedule determined by total tax liability.

TTB Permits and Bonded Premises

Breweries operate under a Brewer’s Notice issued by the TTB. Distilleries must obtain a Distilled Spirits Plant (DSP) permit under 26 U.S.C. Section 5171 before any distillation, storage, or processing occurs. Both permit types classify part of the facility as a bonded premises, a controlled area where untaxed product can be held, transferred, or processed without triggering immediate excise tax. Tax is due when finished product is removed from bond for sale.

Permit applicants must also file for a Certificate of Label Approval (COLA) for each product sold in interstate commerce. For distilleries, the COLA requirement adds a compliance calendar that runs parallel to the tax calendar.

Recordkeeping Under 27 CFR

The TTB’s regulations under 27 CFR Part 19 govern distilled spirits plants and require daily production records covering quantities distilled, proofed, transferred, bottled, and removed from bond. Brewers operate under 27 CFR Part 25 and must track raw materials received, production volumes by batch, removals, and losses. These records must be retained for 3 years from the date of the applicable report. A TTB examiner can request records at any time, so the accounting system must be able to produce batch-level detail quickly.

Federal Excise Tax: Rates and the CBMA Advantage

Beer Excise Tax Rates

The standard federal excise tax on beer is $18.00 per barrel. Under the Craft Beverage Modernization Act (CBMA), made permanent by the Consolidated Appropriations Act of 2021, qualifying domestic brewers pay significantly lower rates:

• $3.50 per barrel on the first 60,000 barrels removed during the calendar year
• $16.00 per barrel on barrels above 60,000 and up to 2,000,000

To qualify for the reduced rate, a brewer must not produce more than 6,000,000 barrels annually across all facilities under common ownership or control. For a 5,000-barrel regional craft brewery paying $3.50 instead of $18.00 per barrel, the CBMA generates roughly $72,500 in annual savings (estimated savings based on rate differential applied to volume).

Distilled Spirits Excise Tax Rates

The standard federal excise tax on distilled spirits is $13.50 per proof gallon. Under the CBMA, qualifying domestic distillers pay:

• $2.70 per proof gallon on the first 100,000 proof gallons removed
• $13.34 per proof gallon on the next 22.13 million proof gallons

To qualify, a Distilled Spirits Plant must not produce more than 22,050,000 proof gallons per calendar year across all controlled facilities. Beginning in 2022, a DSP must also perform a processing activity beyond bottling to claim the reduced rate on processed spirits. A small distillery removing 50,000 proof gallons annually saves approximately $540,000 in federal excise tax compared to the standard rate (estimated savings based on rate differential applied to volume).

The full current rate schedule is published by the TTB at ttb.gov/taxes/tax-audit/tax-and-fee-rates.

Filing Frequency

Excise tax filing frequency is based on total tax liability:

• Annual: Reasonably expected liability of $1,000 or less for the current year, and $1,000 or less in the prior year
• Quarterly: Reasonably expected liability of more than $1,000 but not more than $50,000 for the current year, and not more than $50,000 in the prior year
• Semi-monthly: Liability of more than $50,000

Most craft operations start on quarterly or annual filing schedules and shift to semi-monthly as production scales. A business that crosses the $50,000 threshold should adjust its filing calendar promptly, since late filing triggers penalties and interest. A producer can elect to forgo TTB withdrawal bond coverage as long as it pays excise tax before or on the same day it removes finished product for sale, which removes a bonding cost for many smaller operations. This bond relief has been available since January 1, 2017 under the Protecting Americans from Tax Hikes (PATH) Act.

Brewery and Distillery Cost Accounting

Building Batch-Level COGS

Cost of goods sold in a brewery or distillery is most accurately tracked at the batch or production run level. Each batch has a distinct recipe, ingredient draw, and labor input. A standard COGS model layers the following:

• Direct materials: Grain, hops, yeast, adjuncts (beer); grain mash, botanicals, barrels (spirits)
• Direct labor: Brewing or distilling crew time tied to the specific batch
• Overhead allocation: Depreciation on fermenters or stills, utilities, quality control, packaging costs

The Brewers Association publishes a Cost of Goods Sold Manual that provides a framework for classifying these costs in accordance with GAAP. Under GAAP, overhead must be allocated to inventory, not simply expensed as incurred.

Inventory Valuation Methods

Most beverage alcohol producers use FIFO (first in, first out) for inventory valuation because product typically moves in production order. FIFO tends to produce a more current cost on the balance sheet and is straightforward to audit. LIFO (last in, first out) is permitted under U.S. GAAP but is not accepted under IFRS, creates complexity in environments with stable pricing, and must be disclosed separately in financial statements.

Average cost (weighted average) is another acceptable method, particularly for large-scale producers blending multiple batches before packaging. The chosen method must be applied consistently and disclosed in the notes to financial statements.

Gross Margin by Product Line

One of the most useful management accounting exercises for a brewery or distillery is calculating gross margin by product line or SKU. Taproom pints, wholesale kegs, canned six-packs, and spirits bottles each carry different revenue per unit, packaging costs, and freight. A facility producing a core lager alongside seasonal specialty releases may find that the lager subsidizes the specialty line on a per-barrel basis. Knowing that allows informed decisions about production volume, pricing, and SKU rationalization.

Separating taproom revenue from wholesale revenue is also important for state sales tax purposes, since on-premise consumption is taxed differently than off-premise retail in most states.

Depreciation Strategy for Capital-Intensive Operations

Breweries and distilleries are equipment-heavy businesses. A small craft distillery might invest $300,000 to $1,000,000 in a pot still, column still, and barrel storage before its first bottle reaches a retail shelf. Structuring equipment deductions correctly makes a material difference in year-one cash flow.

Bonus Depreciation (100%, Permanent)

Under the One Big Beautiful Bill Act (OBBBA), 100% bonus depreciation is now permanent for qualified property placed in service on or after January 19, 2025. A brewery that installs a new canning line or brite tank in 2026 can deduct the full cost in year one with no dollar cap tied to bonus depreciation itself. This applies to new and used equipment, provided the property is new to the taxpayer.

Section 179 Expensing

For 2026, the Section 179 expensing limit is $2,560,000, with a dollar-for-dollar phase-out beginning at $4,090,000 of total qualifying purchases. Section 179 can be applied selectively by asset, which gives more planning flexibility than bonus depreciation. For most brewery and distillery capital purchases, bonus depreciation and Section 179 can be layered to maximize the immediate deduction.

Barrel Aging and Inventory Timing

Distilled spirits aged in barrels present a cost accounting wrinkle. Under GAAP, aging spirits in barrel inventory are a current asset, and the costs of the barrel, the fill, and allocated overhead accumulate while the product sits. For tax purposes, spirits held in bond accumulate cost basis without generating taxable revenue until removed for sale. This creates a timing mismatch that a distillery’s tax advisor should address when planning quarterly estimates. Modus works with distilleries on this type of tax planning as part of its advisory services.

State Taxes and Multistate Considerations

Federal excise tax is only part of the picture. Every state imposes its own excise tax on beverage alcohol, collected at various points in the distribution chain. State rates vary widely. Breweries and distilleries distributing across state lines must map each state’s collection point, whether that’s the producer, the wholesaler, or a state-run warehouse.

Economic nexus rules under the Supreme Court’s South Dakota v. Wayfair decision (2018) can also trigger state income or gross receipts tax obligations for direct-to-consumer or direct-to-wholesale sales made without physical presence. While most state alcohol sales flow through the three-tier distribution system, craft producers operating in states with direct-shipping licenses need to evaluate both their sales tax exposure and their income tax nexus in the destination state.

Pass-through entity tax (PTET) elections, which survived the OBBBA, remain a viable SALT cap workaround for brewery and distillery owners operating as S corporations, partnerships, or LLCs taxed as partnerships. Modus’s tax team helps beverage alcohol clients evaluate PTET elections state by state.

Audit and Financial Statement Considerations

Breweries and distilleries seeking bank financing, investor capital, or an eventual sale often need reviewed or audited financial statements. Key areas that an auditor or quality-of-earnings reviewer will examine closely:

• Revenue recognition: Timing of recognition for wholesale orders, taproom sales, and event revenue
• Inventory valuation: Whether overhead is correctly absorbed into WIP and finished goods, and whether obsolete or damaged product has been written down
• Excise tax accruals: Whether the liability for excise taxes on finished goods not yet removed from bond is properly reflected on the balance sheet
• Related party transactions: Particularly common in family-owned craft operations that share space or equipment with related entities

A clean audit trail from the batch production record to the general ledger reduces friction significantly. Modus’s AI-native approach links source-level production and excise tax data directly to audit workpapers, which shortens field work and reduces the information requests sent to the client’s operations team. Learn more about our industry practice.

Related reading: Franchise Accounting: Fees, Royalties, and FDD Item 19

Frequently Asked Questions

How does federal excise tax work for craft breweries?

Federal excise tax on beer is assessed per barrel removed from bonded premises. Under the Craft Beverage Modernization Act, small domestic brewers pay $3.50 per barrel on the first 60,000 barrels and $16.00 per barrel above that threshold, compared to the standard rate of $18.00. Tax is reported and paid to the TTB on a semi-monthly, quarterly, or annual schedule based on total prior-year liability.

What is a proof gallon and how does it affect distillery taxes?

A proof gallon is one liquid gallon of spirits at 50% alcohol by volume (100 proof). Federal excise tax on distilled spirits is charged per proof gallon. A 750ml bottle at 40% ABV (80 proof) contains 0.2 proof gallons. At the CBMA reduced rate of $2.70 per proof gallon, the federal excise tax on that bottle is $0.54. At the standard rate of $13.50, it is $2.70.

What accounting method should a brewery use for inventory?

Most craft breweries use FIFO (first in, first out) inventory valuation because it follows the natural flow of perishable product and is straightforward to support under audit. GAAP requires that overhead be absorbed into inventory, not expensed directly, so a brewery must allocate production overhead such as depreciation, utilities, and brewing labor to each batch’s cost.

Can a brewery or distillery deduct equipment in the year of purchase?

Yes. Under the OBBBA, 100% bonus depreciation is permanent for qualifying property placed in service on or after January 19, 2025. In addition, the Section 179 expensing limit for 2026 is $2,560,000, with a phase-out beginning at $4,090,000 of total purchases. Most equipment acquisitions at a craft brewery or distillery can be fully deducted in the year placed in service.

Do state excise taxes apply on top of federal excise taxes?

Yes. Every state levies its own excise tax on beer, wine, and spirits, collected at different points in the distribution chain depending on the state. Producers distributing across state lines must track each state’s rate and collection point separately. State excise taxes are not a credit against federal excise taxes; they are a separate obligation.

When does a brewery need audited financial statements?

Lenders, investors, and acquirers commonly require reviewed or audited financial statements as a condition of financing or a transaction. There is no fixed production volume or revenue threshold that triggers an audit requirement for a private brewery or distillery, but any business seeking SBA-backed financing above certain amounts, outside equity investment, or positioning itself for sale should expect a financial statement audit or quality-of-earnings review as part of the process.