Issue link: http://winesandvines.uberflip.com/i/152772
grapegrowing As a result, we strongly recommend consulting with your tax advisor before proceeding with a course of action to take the position described above. IRC Section 175: Soil and water conservation expenditures Another opportunity for farmers to accelerate soil-related expenditures is through IRC Section 175, which provides qualified farmers the ability to make an election to deduct soil and water conservation expenditures with respect to land used in farming, the prevention of farmland erosion or for endangered species. While IRC Section 180 provides the opportunity to accelerate costs that are normally expensed in the future through cost of goods sold, IRC Section 175 provides taxpayers the opportunity to deduct costs that would normally end up being capitalized into the basis of the land or as a land improvement depreciated over 15 years. Capitalization to the land is always the least favorable option since these costs would only be recovered upon the sale of the farm property, which is normally at a date in the indeterminate future. IRC Section 175 defines soil and water conservation expenditures to include: expenditures paid for the treatment or moving of earth, including (but not limited to) leveling, grading and terracing, contour-furrowing, the construction, control and protection of diversion channels, drainage ditches, earthen dams, watercourses, outlets, ponds, eradication of brush and planting of windbreaks. It includes any costs related to recommended recovery plans approved pursuant to the Endangered Species Act of 1973. Such conservation deductions are limited in any given tax year to 25% of the gross income derived from farming. In the event expenditures exceed 25% of the farming gross income, the excess is carried forward and deductible on the next year's tax return (and again subject to the 25% limitation). In order to make the election to deduct such conservation expenditures, the expenditures must be consistent with any plan approved by the Soil Conservation Service of the U.S. Department of Agriculture or the recovery plan approved pursuant to the Endangered Species Act of 1973. If no such plan exists, the expenditures must be consistent with any soil conservation plan of a comparable state agency. Even though it is not required to include this information with the return, it is important to ensure this information is documented properly and retained in the related tax years work paper files. Making the election to deduct soil and water conservation expenditures under IRC Section 175 is similar to IRC Section 180, where the election is made by taking the deduction on your tax return. For those wineries that primarily make wines that require a lengthy aging process, this could mean that soil amendment costs remain on the balance sheet for up to three years or more. However, in contrast to IRC Section 180, when an election is made to deduct soil and water conservation expenditures, this method must be followed in subsequent tax years unless the IRS approves the change to a different method. Summary Overall, the elections available under IRC Sections 175 and 180 provide farmers with tax planning opportunities to accelerate deductions that might be capital- ized annually under a taxpayer's current tax accounting methods. By reviewing current accounting methods and making these elections where appropriate, taxpayers potentially have the ability to take deductions in the current year for land-related expenditures, thereby reducing cash requirements for tax needs and increasing the availability of cash to invest in future business development opportunities. PWV Greg Scott is a tax partner at PricewaterhouseCoopers (San Francisco, Calif.) with 34 years of experience in public accounting. Scott has authored a textbook and instructs the course Taxation and Accounting for Vineyards and Wineries through UC Davis Extension. He is a coordinator and speaker at numerous California CPA Education Foundation Courses and various wine industry symposiums. David Pardes is a tax director at PricewaterhouseCoopers (San Francisco, Calif.) with responsibility for tax services to numerous vineyards and wineries including their owners. Pardes has been a guest speaker at UC Davis Extension and Walla Walla Community College. Pardes obtained his MBA from Boston University and a master's degree in taxation from Golden Gate University. Digital Edition Now Available Free to subscribers. Search by keyword. Access current and archived issues. winesandvines.com pr actica l win ery & vin eya r d SEPTE M B ER 20 13 59