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Small Producers Tax Credits for Everyone!

Small Producers Tax Credits for Everyone!

‘Small Producers Tax Credits for Everyone!’ (Said in my best globally famous talk show host voice.)

So you’ve heard that the Craft Beverage Modernization Act was made permanent. And you operate a winery or you support operational reporting for a winery.  Now what?

 

Let’s Begin at the Beginning – Tax Class for Still Wine

Before you can figure out how to take a tax credit, you need to check the tax class.  The rates of tax for still wine can be found in 26 U.S. Code SECTION 5041 (c) or by clicking here if you really want to read tax code.  Effective January 1, 2021, still wine that is not more than 16% alcohol by volume (‘ABV’) is taxed at $1.07USD per gallon and still wine between 16% ABV and not more than 21% ABV is taxed at $1.57USD per gallon.  That means that while the tax rate has not changed, the ABV for still wines in a specific tax class did change.

If you produce still wine and you have removed it tax paid from the winery’s bond, the excise taxes owed are based on the rates listed above.  Still wine that is transferred from the winery’s bond to another bond (typically for storage or order fulfillment) and tax paid later is still eligible for the tax credit.  In short, if you pay tax on still wine of your own production you are eligible for the tax credit described below.

 

Side Note – Labelling Rules

TTB labeling rules for listing the ABV on wine labels did not change.  I received questions about this over the past two years and the listing requirements along with permitted tolerances, can be found HERE.

 

Tax Credit?  What Tax Credit?

Effective January 1, 2021, among other changes, the words ‘For Small Domestic Producers’ is removed from that same 26 U.S. Code SECTION 5041(c) mentioned above. This permanently establishes that the following tax credits are available to all wine producers and importers:

  • $1.00USD/gallon on the first 30,000 gallons produced in the United States or imported into the United States in a single calendar year
  • $.90USD/gallon on the next 100,000 gallons
  • $.535USD/gallon on the next 620,000 gallons

Up to 750,000 gallons of wine are eligible for some form of tax credit in a single calendar year.  Note that while the tax class changes only applied to still wine, the tax credits apply to all types of wine.

Excise Tax Class? Check.  Tax Credit? Check.  Where Do I Claim the Credit?

Before you can claim the tax credits listed above, you need to first tell the Tobacco Tax and Trade Bureau (‘TTB’) that you have removed the wine from bond to tax paid status.  If you work on the winemaking side of the business or support winery operations, you’ve probably heard the terms ‘702’ or ‘5120’, depending on your vintage in the industry.  Those terms apply to the TTB Report of Wine Premises Operations, found HERE on the TTB’s website. This report is where a wine producer declares how much wine they have produced, what winemaking activity (including bottling) occurs and, among other things, what wine is removed from bond during a given reporting period.  (Reporting periods vary based on production volume.) Just in case you’ve looked up the form and you’ve never filled one of these out before, there are two rows on the form where you list wine removed tax paid – Section A (Bulk Wines) on row 14 and Section B (Bottled Wines) row eight. Both rows have multiple cell options depending on the tax class and type of wine or hard cider that was removed, but those rows are where you specify what has been removed tax paid. Once wine has been reported as ‘removed taxpaid’, excise tax is owed on that wine.  After the operations report is filed, it is time to file and pay the excise tax for the wine removed from bond along with claiming available tax credits.

The TTB Excise Tax Return or TTB F 5000.24sm, is where you declare the taxes you owe and credits allowed.

 

Updated Forms Available

There are now forms available for winemaking activity prior to January 1, 2018 and activity from January 1, 2018 to present.  You can find the most common TTB forms HERE.

 

A Permanent Tax Credit is Not a Change in Tax Rate

Making these two changes permanent is great news for producers large and small.  What needs to be clear is that these are two different changes – one to the up to 16% ABV tax rate and the other allowing all producers to claim a tax credit that had previously been reserved for small producers.  While the net impact may be a reduction in taxes paid, it is not a reduction in a tax rate across the board.

For anyone who has read the relevant section of the 5,000 plus page document where these changes were made permanent, you will notice something missing from this post.  This post is directed at domestic wine producers and does not explain how it may apply to importers of wine in the United States.

 

Need More Information?

Cronbach Law Group PC is a law firm located in Napa, California.  Our focus is helping our clients understand the complex world of alcoholic beverage regulation –  50 states, 51 sets of rules. Let us be your guide and keep your busines priorities top of mind on along the way.  www.winedeal.law

 

 

 

 

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Preparing Your Winery for Natural Disasters

Preparing Your Winery for Natural Disasters

It’s been a tough summer. First, the COVID pandemic slowed down commerce, and most recently the massive wildfires are burning throughout Northern California. This year’s fires came earlier than they historically have and this early arrival means grape harvesting is caught in the crossfire. 

Many winery owners are rightfully nervous about what the future holds and are thinking about what they can do to protect their business. Fortunately, the government has stepped in to help businesses impacted by the wildfires and there are numerous action steps you can take today to help prepare you and your business for future natural disasters.

Extended Tax Deadlines

The IRS recently granted some relief to taxpayers impacted by the California wildfires.  It extended the filing deadline for all tax returns and payments that were due starting on August 14 through December 15. The new deadline for these returns and payments is December 15. The California Franchise Tax Board followed suit and issued a similar extension.

So, C-corporations that timely filed for an extension to file their annual tax return would have had to file by October 15. The new deadline is now December 15.

Likewise, S-corps, partnerships, and sole proprietors would have had to file by September 15 but now have until December 15 to do so.

Any estimated income tax payments that would have been due on September 15 are now bumped back until December 15.

Those 3rd quarter payroll tax returns and any payment that would have been due on October 31 are now due by December 15.

If your county has been declared a federal disaster area by FEMA, you will receive this automatic extension. This new extended deadline is automatically applied by the IRS and there is no need to file any paperwork.  As of September 2020, FEMA has declared the following counties federal disaster areas: Sonoma, Napa, Lake, Yolo, Butte, Solano, San Mateo, Santa Cruz, and Monterey.

All penalties and interest will be waived so long as you file all your returns and pay all your tax by December 15. 

Disasters and Insurance

Most wineries have multiple layers of insurance protection. Property, business interruption, and viticulture policies just to name a few. 

Now might be that time you need to make use of your insurance. If you’ve suffered damage from the wildfires, contact your insurance agent right away. Many property insurance policies cover natural disasters like wildfires. And some policies will cover a portion of lost revenue and increased expenses due to business interruptions.

Reviewing your insurance needs should be a regular occurrence. And if you haven’t had that conversation with your agent in a while, now is a good time. Talk through all your business needs to craft the coverage that’s right for your winery. 

Disaster Preparation

It’s never a fun topic to discuss but disaster preparation and plans should be an important part of your winery’s business strategy. With a proper plan and early preparation, you can lessen the chance of being negatively impacted by a natural disaster.

Regular Maintenance Is a Must

Winery owners should make sure their property is in the best possible shape to withstand any natural disaster. Repairs and maintenance should be made regularly, including clearing fallen debris and removing dead or dying landscaping. 

Create a Continuity Plan

Have a plan in place to communicate with winery staff in the event of an emergency. Create a contact list with all employee’s names and phone numbers and establish procedures about how communication will happen in the event of a disaster. Don’t forget to consider how you’ll communicate with customers and suppliers. 

Have a point person at your winery who is responsible for monitoring natural disasters. This person should have clear authority to make decisions about the safety of your crop, inventory, and staff. 

Ensure your plan includes how you’ll protect your equipment, buildings, and inventory.

Protect Your Electronic Data

With so much of your business data stored electronically, be sure that it’s backed up regularly. The backup should happen off-site so that in the event your computers and servers are damaged, you’ll still have access to all your records.

If you’ve been hesitant to use the cloud to store your data, consider making the switch. Most cloud storage providers make multiple backups each day and access is easy from anywhere you have an internet connection. Cloud storage could help your employees to continue working even if your winery has been evacuated or damaged from a natural disaster.

Document, Document, Document.

Keep thorough and complete records of all your business assets and keeping pictures of all your assets will help if you have to make a claim to your insurance carrier. 

You’ll want to document:

  1. The type of asset, including model number and serial number, if applicable
  2. The year it was placed in service
  3. The price you paid for it
  4. Any customizations made to the asset

A good place to start would be using a fixed asset schedule or report. If you don’t keep this schedule, your tax accountant should have a copy. 

Keep in mind all your assets might not be on the fixed asset schedule. Inexpensive equipment like computers or office furniture may not be on the fixed asset schedule, but you’ll want to keep track of those, too. 

Managing and Protecting Inventory Before a Disaster

Inventory is one of the largest assets a winery owns. With a robust inventory management system, you’ll know exactly what you have, and protecting your inventory from a natural disaster should be included in your contingency plan. 

Your wine racks should be sturdy enough to withstand the shaking of an earthquake or strong winds from storms and your wine inventory should be well organized and labeled correctly. 

Keeping your inventory system up to date and organized will be helpful in the event you need to file an insurance claim. 

Your inventory management system should know the exact dollar value of all your inventory at any given moment.  And if you hold a large amount of inventory, ensure your insurance policy covers all of it.  A report with your costs and quantities can be created quickly.

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American Viticultural Area Valuations Offer Potential Tax Savings for Wineries

American Viticultural Area Valuations Offer Potential Tax Savings for Wineries

Producers and consumers place great value on where their wine grapes are grown. The famous wine-grape producing areas—such as Napa Valley, California, and Walla Walla, Washington— have come to be publicly associated with quality.

However, many wineries are surprised to learn this perceived quality can be quantified and used to offset tax liabilities in the years following a vineyard purchase. The more prestigious the land area, the greater the potential savings.

This complex process includes an American Viticultural Area (AVA) valuation, and the potential tax savings can be significant. Here’s what wineries and vineyard owners need to know about the process to potentially benefit from the savings opportunity.

What’s an AVA Valuation?

An AVA is a geographic area where wine grapes are produced, as defined by the Alcohol and Tobacco Tax and Trade Bureau (TTB). As of June 3, 2020, there are 248 established AVAs in the United States, with 139 in California.

An AVA may have an intangible value associated with the quality of the grapes produced within it. Unlike land, producers may be able to amortize the value of this asset for tax purposes, but doing so requires a valuation to determine the intangible value of the AVA.

Intangible Value

Simply put, the intangible value of a production area results from the perceived value of the wine and wine grapes produced there. This value comes from a number of factors, such as established root stock, weather, soil quality, and consumer preference.

Wineries are only allowed to claim their wine was produced in an AVA if the following conditions are met:

  • 85% of the grapes used to produce it were grown there
  • The wine is registered with the TTB

Grape Pricing Comparison

Prices paid for grapes from different regions can vary dramatically. The graphs below illustrate 2019 bulk grape pricing in California, as reported by the US Department of Agriculture (USDA) for different crush districts.

Grape Pricing Comparison

For example, in the Cabernet Sauvignon grape pricing chart, we can see that in district four—which is Napa County—the median price of Cabernet Sauvignon grapes was approximately $9,000 per ton.

This can be compared to the median of district 10—which includes the Sierra Nevada Foothills counties such as El Dorado and Amador—where the median price for Cabernet grapes was $1,625 per ton.

Potential Tax Benefit

When a buyer purchases a vineyard, the AVA intangible creates a potential tax savings by amortizing the AVA value in the 15 years after the purchase occurs.

If an AVA intangible isn’t measured at the time of a purchase, an AVA valuation can still be performed and the amortization expenses can be retroactively applied to recognized deductions not taken in prior years.

Amortization

Amortization is the gradual recognition in income of a capital expense over a specific period of time. It’s typically associated with intangible assets—like trademarks—or, in this case, AVAs.

Essentially, it expenses the intangible value of the AVA associated with the land. This option allows vineyard owners to put some of the money they’ve spent to acquire land in a highly desirable AVA back into their businesses.

AVA Valuation Methods

If you purchase a vineyard, you can’t depreciate or amortize the value of the land used to grow the grapes. There’s a distinct separation between the AVA value and the value of the land.

Quantifying the AVA value happens through a complex process known as an AVA valuation. The resulting amount is what vineyards are able to claim for amortization.

There are a few different methods used to determine the potential AVA value.

With and Without

This method involves looking at two scenarios in which vineyards producing the same grapes of similar quality are compared. One vineyard is within a particular AVA, and one isn’t.

By comparing different prices of the grapes produced in each area and the subsequent effect on projected cash flows from the vineyards, the AVA’s intangible value can be calculated.

Relief from Royalty

Estimating a hypothetical avoided royalty or licensing fee is a common way to value tradenames. Distinguishing that a wine is made with grapes from a specific AVA is much the same as marketing that wine with a specific trademark.

While we know AVA designations can’t be licensed, wine brands, as well as brands for other similar products, can be. Comparing the licensing and royalty fees that might be paid by wineries wishing to use different brand names on their packaging offers many insights into the potential value an AVA designation could offer.

Generally, the more profit a winery can produce by licensing a brand, the higher the value of the associated intangible asset.

Vineyard Land Sales

Also known as the market approach, comparing the sale records of different vineyards offers an indirect way to quantify the effects of an AVA designation on land value.

While the price of vineyards can be impacted by many factors, these designations can have a significant impact on comparative vineyard value. The goal is to separate the cost of the land from the value provided by the AVA designation.

Getting Started

With owners making claims about AVA value due to the potentially significant tax savings, the IRS and states are increasing scrutiny on these claims. The larger the claim, the more likely an examination could occur.

Making a well-supported claim should be the ultimate goal. Utilizing multiple valuation methods, providing the appropriate documentation, and working with an advisor with deep industry expertise can help the process move smoothly.

Next Steps

For more information about AVA valuations and how they could help your winery save money, contact an accounting or consulting professional.

Donovan Trone has worked in finance and research since 2009, performing valuations services for operating companies, partnerships, and limited liability corporations for mergers and acquisitions and financial reporting. He can be reached at (408) 558-4320 or donovan.trone@mossadams.com.

Alex Luke has worked in data processing and analysis since 2013. He has extensive experience in data solutions, marketing and business, and valuations analysis. He can be reached at (425) 961-7029 or alex.luke@mossadams.com.

Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.

5 Things to Know about R&D Tax Credits for Vineyards and Wineries

5 Things to Know about R&D Tax Credits for Vineyards and Wineries

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.