Q&A with a Winery Tax Expert
- What tax relief is available for wineries affected by fires in 2017?
The IRS has announced that individuals and businesses affected by the fires in California now have until January 31, 2018 to file certain tax returns and make certain payments. There are currently seven counties eligible for relief: Butte, Lake, Mendocino, Napa, Nevada, Sonoma and Yuba. This list may continue to grow if the disaster continues to spread. Individuals, businesses, as well as visiting firefighters and relief workers, qualify for the extension.
Individual and business tax filings and payment deadlines that occurred starting on October 8, 2017 have been extended, giving those affected until January 31, 2018 to file returns and pay any taxes originally due during this period. The affected deadlines include:
- Extension for October 31 deadline for quarterly payroll and excise tax returns
- Extension for calendar year tax-exempt organizations with 2016 extensions running out on November 15, 2017
- Waiving of late deposit penalties for federal payroll and excise tax deposits normally due between October 8 and October 23 (if deposits are made by October 23, 2017). Find additional information on the disaster relief page on IRS.gov.
- What is the difference between casualty loss and disaster loss?
These two types of losses overlap. Every disaster loss is also a casualty loss, but not every casualty loss is a disaster loss.
Disaster Area Losses: a loss that occurred in an area declared by the President to be eligible for federal assistance— usually during a major disaster or emergency. The following website maintains an updated list of the disaster declarations by year and area: https://www.fema.gov/disasters/grid/year
Casualty Losses: the result of damage, destruction, or loss of property from any sudden, unexpected, or unusual event. This includes flood, hurricane, tornado, fire, earthquake, or volcanic eruption. Some losses due to vandalism, theft and human cause may also qualify. A casualty doesn’t include normal wear and tear or progressive deterioration.
- My home is located on my winery and both have been damaged by fire, how will this affect my taxes?
The amount of loss not covered by insurance should be deductible as casualty losses for both your home and business — the difference is compliance or tax forms. For your home, you can claim casualty losses for any personal property on your individual tax return, Form 1040. Losses from the winery are business related and should therefore be claimed on the business return.
- If I donate wine, can I claim it on my tax returns as a charitable contribution?
Yes, it is characterized as a non-cash donation. The value of the deduction will depend on whether the wine was an inventory item or wine collection. Typically, you will be limited to your cost basis. However, if you donate an inventory item, the amount of your deductible contribution is the fair market value (FMV) of the item minus any gain you would have realized if you had sold the item at its FMV on the date of the donation.
Note that depending on the value of the donated wine, additional information may be required. If the value of your non-cash donation exceeds $500, but is less than $5,000, you will need to include additional IRS tax forms with your tax return (Form 8283 Noncash Charitable Contributions). If the value of your non-cash donations exceeds $5,000 dollars, you will need to obtain an appraisal report from a qualified wine appraiser, unless it is inventory.
- What counts as Research and Development (R&D) for wineries?
Most people think that R&D is only for tech and medical companies, but agriculture can also qualify for the Federal Research and Development Tax Credit. Eligible costs typically include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.
The Tax Credit allows a credit of up to 20% of the excess of qualified research expenses, which must meet the following criteria:
- New or improved products, processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
For wineries, the following processes may qualify for R&D Credit:
- Developing wine cave
- Land development and irrigation improvement
- Analytical software
- Harvesting technologies
- Gene culturing
- Spoilage prevention
- Preservation (after the bottle has been opened)
- Wine blending
- Packaging and bottling innovation
To claim the credit, a third party may be hired to perform a Research and Development study aimed at identifying qualifying processes and activities. If R&D efforts do not warrant a third party study, internal documentation with respect to innovative processes and activities should be maintained to support qualifying expenses for R&D credit calculation.
- Do wineries qualify for the Section §199 Tax Deduction?
Any manufacturing, blending, and finishing of wine that is later poured into a bottle with a label for wholesale is considered an eligible production activity. 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 of the taxpayer for the tax year or (2) taxable income (determined without regard to Section 199) for the tax year. The deduction is also limited to 50% of the W-2 wages of the employer for the tax year. The IRC § 199 deduction is allowed for both the regular tax and the alternative minimum tax.
Bottom line, if you’re making wine and making money, there is 9% deduction in taxes that is available to you. Note that the Trump Administration’s tax reform proposal is seeking to eliminate this deduction, so take advantage of it while you can!
- Are there any additional tax breaks for wineries?
There are many special deductions available to agricultural businesses, here are a few that most wineries can benefit from:
- Agricultural businesses, including wine producers, can carry losses back five years, while most businesses are only allowed a two-year net operating loss carryback
- Many growers who cannot use the cash method can deduct post-harvest/pre-bud break costs.
- Agricultural equipment that is primarily used in producing and harvesting is allowed a sales tax exemption. Solar equipment that help power qualifying machinery are exempt from sales tax. If you have already installed a solar system, you may be eligible for a refund on taxes paid up to three years ago
- IC-DISC: if your winery exports products, it may benefit from Interest-Charge Domestic International Sales Corporation (IC-DISC) entity structure. IC-DISC only exists on paper and it is not taxed at the federal level. This entity’s sole purpose is to collect sales commission from overseas and then distribute the income back to their shareholders in the form of qualified dividends. Tax savings can be significant at the highest tax bracket due to lower rate at which qualified dividends are taxed compared to ordinary income.
Monic Ramirez is a Tax Partner at Sensiba San Filippo specializing in tax planning and compliance. She is an expert in multi-state taxation and foreign operations and works with a wide range of industries, including closely-held businesses, agriculture and manufacturing and distribution. Monic can be reached at email@example.com or at 408.776.8900.