Vineyard for Sale–What are the tax benefits?

Vineyard in San Luis Obispo County. Photo from Shutterstock.

Vineyard in San Luis Obispo County. Photo from Shutterstock.

Tax Planning Opportunities

1) Vineyard operations qualify as farming activities, and therefore qualify for the same incentives as other farming operations.  There are a lot of generous tax write-offs here, as long as you can proof that you have a profit motive. A formal and realistic business plan is your best defense against hobby loss attacks by the IRS.

2) If a vineyard’s farming operations and a winery’s manufacturing operations can be seen as part of one “group” for tax purposes, the vineyard is not taxed on its grape sales to the winery, and the winery is only taxed when the bottles of wine are sold. This provides a big quasi-permanent tax deferral.

Buying a Vineyard?

So, you found a small vineyard for sale in California, and you are probably wondering if purchasing it makes financial sense. Or, you want to buy a share in a vineyard. Before you invest in a vineyard, you will want to understand the potential tax benefits, and what you need to do to qualify for them. A few things to look out for are the following:

  • Hobby vs. for-profit classification by the IRS;
  • Business plan;
  • Legal entity selection;
  • Minimum involvement required to be considered “material participation”;
  • Accrual basis of accounting vs. cash-basis of accounting for tax purposes;
  • Tax classification of costs involved in producing the first commercial crop;
  • Valuation of appellation rights; and
  • Vineyard purchase price allocation and identification of all Section 179 depreciable assets.

The IRS often argue that new vineyard operations are hobbies because they usually make losses for the first 7 years or more. Your best defense against this is a thorough business plan, against which annual performance is measured. A business plan is more than the cost estimates your vineyard management company provided you with. It requires forecast cash flow projections, documented marketing strategies, and realistic projections of both income and expenses.

Vineyard operations qualify as farming activities, and therefore qualify for the same incentives as other farming operations. There are, however, a few intricacies unique to vineyards. Appellation rights, for instance, also qualify as a Section 179 depreciable asset. This can be between 5% and 30% of the vineyard’s purchase price! It is therefore very important to obtain an appraisal of the appellation rights.

As an added benefit to an appellation valuation, we frequently discover other depreciable assets “buried” in land value. These include roads, fences, wells, etc. For all of these, catch-up deductions can be claimed. So even if you purchased your vineyard a few years ago and you missed out on these deductions, the problem can be fixed.

Capital Coast, in cooperation with Greg Scott, provides tax consulting services to vineyard owners and individuals interested in buying a vineyard.

We can also prepare a business plan for you.

Vineyard Business Plan

In the business plan, we recommend using the same expense categories as the IRS requires. This allows you to use the actual and projected costs to estimate the timing of your related tax deductions.

Contact Rudi Prozesky, Owner of Capital Coast–CPA and Valuation Firm, for more information at rudi@capitalcoast.us or 844-833-3600.

Buying a Winery?

Whether you are buying a stand-alone winery or an integrated winery (one with its own vineyards), you need to give the selection of a legal entity careful consideration. Winery operations have higher liability risks than vineyards. Wineries involve wine tastings and manufacturing operations, and both of these could potentially get an owner involved in a liability law suit. We therefore strongly recommend that you hold any winery operations in a separate legal entity from farming operations and personal assets.

The selection of a legal structure is complicated by significant potential tax savings available to integrated wineries.  If the vineyard and winery operations can be seen as part of one “group” for tax purposes, the vineyard can use cash basis accounting and the winery accrual basis accounting. This results in a significant amount of farming costs being deducted when paid/incurred, and the revenue is only taxed when the product (bottles of wine) leaves the group. The vineyard is therefore not taxed on its grape sales to the winery. The group is taxed on the profit realized only when the bottles of wine are sold.

A few things to look out for when buying a winery are the following:

  • Hobby vs. for-profit classification by the IRS;
  • Legal entity selection to address potential liability issues;
  • Legal structure that facilitates estate tax planning;
  • Legal structure that supports employee incentive schemes;
  • Winery Business plan to support for-profit claims–Above comments on vineyard business plans also apply here to winery business plans;
  • Minimum involvement required to be considered “material participation”;
  • Accrual basis of accounting for vineyard and cash basis of accounting for winery operations;
  • Inventory costing;
  • Valuation of appellation rights for the vineyard; and
  • Winery purchase price allocation and identification of all Section 179 depreciable assets.

Please contact us for a formal opinion based on your unique circumstances.

Capital Coast, in cooperation with Greg Scott, provides tax consulting services to individuals interested in buying a winery.

Contact Rudi Prozesky, Owner of Capital Coast–CPA and Valuation Firm, for more information at rudi@capitalcoast.us or 844-833-3600.

Also ask about our additional services for vineyards and wineries:

  • Bookkeeping
  • Accounting
  • Wine inventory costing consulting
  • Business plans and tax projections
  • Estate tax planning
  • Tax filings
  • Accounting system design and implementation
  • Valuation of wineries for sale
  • Valuation of vineyards for sale