Fixed assets, also known as property, plant, and equipment, can be a powerful tax savings tool when managed correctly. Leveraging cost recovery incentives and tax credits can strengthen a company’s financial footing and open doors to additional capital investments.
Due to the nature of the business, most companies in the wine industry are capital intensive.
Tax opportunities in the wine industry can include:
- Deferring tax liabilities to later years
- Reducing current-year tax liabilities
- Increasing current-year cash flow
Increasing your cash flow can also allow you to reinvest savings into your business or simply weather an uneven economy.
5 Tax Savings Opportunities for Wineries and Vineyards to Pursue
There are several areas within your operations that can go overlooked.
Wine production requires significant equipment for more than just the crusher, fermentation tanks, or bottling line. Equipment includes the infrastructure and process-related electrical and plumbing hookups embedded within the winery facility.
These can comprise a significant share of the properties’ total acquisition or constructed cost. The more equipment and equipment support systems present, the higher percentage in assets available for shorter recovery periods—ultimately increasing your tax deferral opportunities.
For example, a $1 million winery facility could have 25%–45% of the property allocated to shorter depreciable lives, a possibility of $250,000 to $450,000 of federal tax deductions in the year the property is placed in service.
Energy Efficiency Incentives
Assets that qualify for shorter recovery periods are only a portion of your potential. Most winery facilities adopt environmental and design development criteria when constructing or renovating their facilities. For instance, more and more industries, including the wine industry, have continued to roll out environmental, social, and governance (ESG) initiatives. These efforts are opening doors to additional benefits in energy efficient tax credits and deductions.
The incentives are measured against the facilities’ ability to utilize alternative power systems, such as solar energy collection, as well as the installation of energy efficient lighting; heating, ventilation, and air conditioning (HVAC); and building envelope products.
Improvements and Retrofits
Wineries that make large improvements or retrofits to their production processes often have additional opportunities. Once a taxpayer renovates an existing building—demolishing portions of the building to accommodate new updates—they may write off the basis in the disposed assets.
If there’s remaining basis in the building, the disposition of the assets and deduction of the current demolition costs can significantly reduce your current tax liability and free up cash.
The benefit opportunities don’t end with fixed assets. There are several other ways to pursue tax benefits, including valuing the American Viticulture Areas (AVAs) in which your vineyards are located.
When a buyer purchases a vineyard, they can also acquire an AVA intangible asset. The AVA value is recovered over 15 years through amortization, creating annual deductions that lower taxable income. This is an attractive opportunity because it provides tax deductions by shifting value out of land which is otherwise non-depreciable.
If an AVA intangible isn’t measured at the time of purchase, an AVA valuation can still be performed and any missed amortization deductions can be taken in the year of application.
Small Business Status
Businesses in the wine industry with less than $26 million in average annual gross receipts (AAGR) may qualify for special treatment as a small business.
For vineyards, this status may allow them to use modified accelerated cost recovery system general depreciation system (MACRS GDS) even when expensing pre-productive farming costs—allowing the taxpayer to use bonus deprecation to its full potential.
For wineries, this status could give the taxpayer the opportunity to use a simplified method of accounting for inventory which then allows them to deduct accelerated depreciation on production assets that would otherwise get capitalized in wine inventory.
We’re Here to Help
To learn more about tax savings opportunities for your winery, please contact your Moss Adams professional.
You can also visit our Wine, Beer & Spirits Practice for additional resources.