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E CONOMICS Hidden Deductions for Wineries and Growers Wine accounting experts outline savings available despite pending tax increases By Paul Franson N o one likes to pay taxes, but partner Greg Scott of accounting firm Pricewa- terhouseCoopers says that many smaller wineries miss special deductions that could provide substantial tax relief. "Agricul- tural businesses have many special deduc- tions not allowed for other businesses," he says. He adds that his firm sees untaken de- ductions all the time. "One (larger) com- pany was able to recover $26 million over the prior allowed three years of changes to returns just by careful attention." Management at another ag company learned it could deduct the six-figure amount spent for a fish ladder required for a creek on its property, something that had never occurred to anyone there. Scott noted, "Ag has the most-favored- nation status of taxes." Many of these deductions result from intense lobbying by big ag businesses, and most grapegrowers are just collateral ben- eficiaries, while other provisions represent the vagaries of growing crops. In addition, many special financial in- centives passed to stimulate the economy after 9/11 still apply, but they are about to end. This summer PwC hosted a seminar to go over some of these tax provisions and recent changes to tax laws for local wine businesses. The intense, comprehensive and fast-paced session only scratched the surface, and it's clear that any wine company should have an accountant very familiar with its special tax needs. Scott, for example, has 30 years of experience in the area, and he initiated the ability to depreciate AVAs among other boons to wineries and growers. With that move, he inspired the IRS to 40 WINES & VINES SEPTEMBER 2012 recognize that being in an AVA is an intangible asset eligible for amortization over 15 years. In addition, accountants should segre- gate many other depreciable assets often "buried" in land costs such as fences, roads and wells. "One (larger) company was able to recover $26 million over the prior allowed three years of changes to returns just by careful attention." —Greg Scott, partner PricewaterhouseCoopers Ag-specific provisions Most companies are now required to use accrual accounts, not cash, but nurseries can continue to use the cash method to get tax basis to zero. Expenses encountered for soil and water conservation required by government agencies—as well as to protect endangered species—also can be deducted, not capital- ized. Likewise, conservation easements can reduce taxes, but also reduce basis. While most businesses can only claim a two-year net operating loss (NOL) carry- back, ag businesses can carry losses back five years. Also, many growers who can't use the cash method can deduct post-harvest/pre- bud break costs. These can be big num- bers for larger growers. Inventory confusion Accounting for inventory offers many possibilities for savings: The costs of the whole term of production applies for wines that are aged, not just the current year. Likewise, the value of the wine aged and different packaging costs matter. There are differences between the way grape costs are handled in generally ac- cepted accounting principles and for tax purposes, too. One of the recent upheavals to hit wineries is being forced to adopt more specific item definitions for LIFO (last in, first out) accounting for inventory. Each different wine produced—variety, appel- lation, self-grown vs. bought, multiple vintages in the same stage of production, blends, selections from a lot regarded as reserve, packaging—should be treated as separate items, not just lumped together by variety. State taxes States are getting very aggressive in try- ing to raise money through audits, and one way to avoid large penalties is to file a voluntary disclosure agreement with the tax agency regarding claims that might be unusual. States also try to get companies to pay taxes if they do business there, but the federal government has ruled that just soliciting sales doesn't create a legal pres- ence (nexus.) This is only true in states levying income taxes, however; it doesn't apply in other states. California has generally outlawed net operating low carryover for 2008-11 except for small businesses (less than $300,000 in taxable income in 2010 and 2011.) However, for 2013 a two-year NOL carryback is being phased in. A tax- payer may carry back 50% of the loss for 2013, 75% for 2014 and 100% for NOL incurred thereafter. The PwC speakers said they expect this to change as the state seeks to balance its budget, however. Ag equipment is allowed a sales tax exemption, and solar panels that help power a farm are exempt (previously they weren't if they were tied into the power grid.) Trellis parts—but not labor—are eligible for the sales tax exemption, too. While food-processing machines used to turn large carrots into "miniature carrots" get a tax deduction, other processing equipment like crushers, destemmers and presses do not. Large wineries are looking into addressing this inequity. WINE INDUS TR Y FINANCE