The Tax Cuts and Jobs Act offers numerous tax planning opportunities for businesses in the wine industry. Several changes took place with the implementation of this Act. The following details the most prominent changes and how they can affect wineries and vineyards throughout the United States. It’s important to remember that the changes discussed below are Federal IRS changes. Businesses in the wine industry must still pay attention to state tax rules.
Cash Method of Accounting
Under Sec. 448(c) wineries and vineyards with annual average gross receipts totaling $25 million or less over the past three years can now use the cash method of accounting as opposed to the accrual method of accounting. Previously, the cash method was only available to individuals and businesses with annual gross receipts totaling less than $1 million. This is one of the most significant changes under the Tax Cuts and Jobs Act.
It’s important to note that restrictions apply to this new law. Taxpayers that own multiple businesses and those with certain losses might not be able to take advantage of the cash method of accounting. A qualified accountant with wine industry experience can help you determine if your business qualifies.
Accounting for Inventories
In addition to simplifying accounting, the new tax law (Sec. 471 (c)) allows wineries and vineyards with annual average gross receipts of $25 million or less over the past three tax years to treat certain inventories as non-incidental materials and supplies. Qualifying businesses also have the option to elect to use an inventory method that conforms to their financial treatment of inventories.
Under the new tax law, qualifying businesses only need to capitalize raw materials costs into inventory. This is exciting news for vineyards and wineries who typically have several years of production costs trapped in inventory.
Starting in the 2018 tax year, qualifying wine industry businesses that meet the income requirement only need to include the costs incurred from purchasing grapes, bulk wine, glass, corks, bottles, and other bottling supplies into their inventory. They can simply deduct all other inventory overhead including grapes grown, winemaking salaries, depreciation, and more.
Additional Depreciation for Vines
Prior to tax reform, vineyards that planted or grafted vines could apply a 50% additional depreciation for the year the plant was planted or grafted. The new law increases this depreciation to 100%. However, it’s important that taxpayers weigh the benefits of this election against their method of accounting for pre-productive costs and the availability of bonus depreciation when the vine becomes productive.
The new tax laws went into full effect during the 2018 tax year. It’s important to remember that the cash method of accounting isn’t an automatic change. Qualifying taxpayers wishing to change their method of accounting must file for this change.
Prior to taking any actions, it’s important that wineries and vineyards fully analyze their financial situation and the benefits and drawbacks each action might have on their business. When buying a winery it’s wise to get help from a broker or attorney to advise you on where to buy, prices, when to sell, and other aspects of vineyard economics.
Allen Wine Group can help you determine which actions your business should take. Our experienced accounting experts provide tax planning advice to businesses in the wine industry. Our CFO and accounting services are backed by years of experience.
Please contact us if you have questions about how these changes might affect your business.