by Travis Riley, CPA & Partner and Josh Harbin, CPA & Senior Manager – Moss Adams
R&D is often associated with technology and life science companies from Silicon Valley and San Francisco or head less than 100 miles north into the wine country or any other appellation across the United States, and you’ll find the same trend toward innovation being applied to the ancient practices of grape growing and winemaking.
However, many in the wine industry fail to utilize R&D tax incentives offered by federal and state governments. For wineries and grape growers, the potential tax savings could be significant. This article outlines key information to help wineries and grape growers benefit from this savings opportunity.
But first, what is the R&D tax credit?
The R&D tax credit is available to companies developing new or improved products or processes, including software, that results in increased performance, functionality, efficiency, reliability, or quality.
It’s a dollar-for-dollar tax saving that directly reduces a company’s tax liability. There’s no limitation on the number of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years (or indefinitely for California tax returns). In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes.
A new or small business may be eligible to apply for the R&D tax credit against their payroll tax for up to five years starting in 2016. The R&D credit is available both at the federal and state level, with many offering an R&D credit to offset state tax liability.
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To help break down this complex topic, here’s a list of common questions vineyards and wineries have about the R&D credit.
1. How much can a company save with R&D tax credits?
Companies can receive a credit refund of up to 11% of their qualified expenses, depending on a number of factors. Generally, the more a company spends on qualified R&D, the higher the credit they’ll receive, with taxpayers receiving a larger credit if they increase R&D spending year over year.
2. What is qualified R&D?
Qualified R&D ultimately depends on whether the activity meets each element of the four-part test established in the tax code. These criteria include:
- Elimination of uncertainty. The activity is undertaken to discover information intended to eliminate uncertainty about the capability, method, or design of a new or improved product or process.
- Process of experimentation. The activity involves one or more alternatives intended to eliminate that uncertainty, and the conduct of a process of evaluating the alternatives (through modeling, simulation, or a systematic trial and error methodology).
- Technological in nature. The process of experimentation must rely on hard sciences, such as engineering, physics, chemistry, biology, or computer science.
- Qualified purpose. The activity relates to a new or improved function, performance, reliability, or quality of a product or process.
3. What vineyard and winery activities qualify for the R&D credit?
Vineyards and wineries often aren’t aware that many of the activities they perform—potentially at each stage of the winemaking and grape growing process—could meet this qualification.
Following are some specific examples of R&D activities that have qualified for the credit.
Testing or Evaluation
- Geological plot characteristics, including soil, water, and climate conditions
- Rootstocks, varietals, and clones for optimal cultivation in the vineyard
- Fermentation methods to improve wine quality, flavor profiles, or economic efficiencies
- Filtration methods to improve wine quality
New and Improved
- Formulations for vine and soil nutrient management
- Pruning and training techniques for optimal production
- Techniques or formulations for pest and disease management
- Methods to treat harvested grapes prior to sorting and destemming
Design or Development
- Irrigation systems and water management techniques
- Trellising systems for the desired canopy
- Systems, structures, or techniques to improve harvesting processes
- Automated sorting and crushing processes or equipment
- Methods or systems to manage wastewater
- Fermentation methods, processes, or techniques
- Clarification methods or techniques, including improvements to fining and filtration processes
- Product formulations for desired flavor or aroma profiles
- Subterranean wine cave improvements
- Bottling and packaging processes
4. What types of expenses can be included?
If a company determines the work it’s conducting likely qualifies, identifying related expenses is the next consideration.
Most expenses fall into three categories: wages, supplies, and contractor expenses.
Wages
Qualifying employee wages can include Form W-2, Box 1 or pass-through income subject to self-employment tax. This would include individuals performing qualified research, as well as those that directly support or supervise the research. The rules specify that if an employee is 80% qualified, 100% of their wage can be included to calculate the credit.
Supplies
Qualifying equipment and materials related to the research process can include the following:
- Some large-scale prototypes and pilot models
- Tangible property (other than land or depreciable property) that’s used in qualified research, including grapes, fining agents, corks, bottles, barrels, barrel staves, testing supplies, and batches of wine used in experimental blends
Contractor Expenses
Payments to contractors can be eligible, contingent on rules, including:
- Expenses paid would be eligible if the same services were performed in-house
- Contractors must be performing an activity that would have qualified if performed by employees
- The taxpayer must be at risk in the sense that their payment isn’t contingent on the contractors’ results
- The taxpayer must retain substantial rights—shared rights or greater—in the results
5. What’s the next step to apply for the R&D credit?
Each company’s goals, values, and resources are unique, which makes it important to develop a customized project plan to identify, calculate, and support your company’s R&D credits and activities.
If you think your company may qualify for the R&D credit, the first step is to collect preliminary information about your company’s potential qualified activities. That information is used to develop an estimate of the credit benefit your company could receive as well as identify other R&D-related tax planning opportunities so you can make an informed decision about whether an R&D credit analysis is worthwhile for your company.
With recent increased IRS scrutiny around R&D credits, it’s also crucial to understand what’s necessary to substantiate a credit claim. To learn more about R&D tax credits, see Five Misconceptions about Tax Credits – And If You Qualify or request a credit benefit estimate to see how much your company could save.
Travis Riley is a partner at Moss Adams. He has provided research tax credit studies to companies claiming R&D credits since 2006. He can be reached at (916) 503-8242 or travis.riley@mossadams.com.
Josh Harbin is a CPA and senior manager at Moss Adams. He has provided research tax credit studies to companies claiming R&D credits since 2012. He can be reached at (916) 503-8241 or josh.harbin@mossadams.com.
FAQs About R&D Tax Credits for Wineries and Vineyards
What is the R&D tax credit, and how does it benefit wineries?
The R&D tax credit offers wineries a chance to save significantly on taxes. It’s a dollar-for-dollar reduction of tax liability for companies that invest in improving their processes, products, or technology. For wineries, this could mean savings on expenses related to grape growing techniques, fermentation methods, or even packaging innovations. The credit can offset federal and state taxes, and unused credits can be carried forward for up to 20 years, offering a long-term financial advantage.
Which activities in winemaking qualify for R&D tax credits?
Surprisingly, many everyday activities in winemaking qualify for R&D tax credits. For example, testing soil characteristics, experimenting with grape varietals, or improving fermentation processes all count. Even designing better irrigation systems or trellising methods could be eligible. These activities contribute to enhancing product quality or production efficiency, which meets the criteria for R&D credits.
What expenses can a winery include in R&D tax credits?
Wineries can include a wide range of expenses in their R&D tax credit claims. This includes employee wages related to research, supplies used in experimentation, and payments to contractors who help with innovation. For example, wages paid to staff working on new wine formulations or equipment used for testing fermentation techniques are eligible. Contractor costs, as long as the winery retains rights to the results, also qualify.
How much can wineries save through R&D tax credits?
The savings from R&D tax credits can be substantial. Companies can receive a credit refund of up to 11% of their qualified expenses. For wineries, this means potentially saving thousands, depending on the amount spent on eligible activities. The more a winery invests in innovation, the greater the tax credit they can claim. According to some estimates, businesses that maximize their R&D efforts can save up to $250,000 annually through these credits.
Do small wineries qualify for the R&D tax credit?
Yes, even small or new wineries can qualify for R&D tax credits. Thanks to legislation changes in 2016, businesses with less than $5 million in gross receipts can apply their R&D tax credits toward their payroll taxes for up to five years. This is a huge benefit for newer or smaller wineries that might not have significant income tax liabilities yet.
Can wineries amend past tax returns to claim R&D credits?
Absolutely! Wineries can amend past tax returns for up to three years to claim missed R&D credits. If your winery wasn’t aware of these credits in previous years, you might still be able to recoup taxes you’ve already paid. This retrospective claim could provide a substantial refund, especially if significant innovation activities have occurred in those years.
What documentation is needed to claim R&D tax credits?
Proper documentation is critical for claiming the R&D tax credit. Wineries need to keep detailed records of their qualifying activities, including invoices for supplies, wages paid to staff, and research conducted. Additionally, keeping a log of experiments, process improvements, and outcomes will strengthen your case if the IRS scrutinizes your claim. Consulting a tax professional can help ensure all necessary documentation is in order.
How does the R&D tax credit work at the state level?
Many states, including California, offer additional R&D tax credits to offset state tax liabilities. While each state’s credit structure varies, most follow similar eligibility requirements as the federal credit. For example, in California, businesses can carry forward unused R&D credits indefinitely, offering ongoing financial benefits to wineries investing in innovation.
What are the misconceptions about the R&D tax credit?
One common misconception is that only high-tech companies qualify for the R&D tax credit. In reality, industries like agriculture and winemaking can also benefit. Another myth is that only large companies are eligible, but small and medium-sized wineries are equally entitled to these credits. Lastly, many believe that it’s difficult to qualify, but with proper guidance, most businesses performing innovative activities can successfully claim this credit.
How can wineries start the process of applying for R&D tax credits?
To get started, wineries should assess their activities and gather relevant information about their innovations. This includes outlining processes that have been improved, tracking expenses, and identifying employees involved in research. Consulting a tax advisor with expertise in R&D credits can help create a customized plan to maximize your tax savings. Starting early and maintaining thorough documentation is key to a successful claim.
