This article originally appeared August 16, 2020 in The SOMM Journal.
I trust it is not controversial to say that no one gets into winemaking for their love of tax planning or corporate finance. But it is good business and financial management that ultimately enables winemakers to do what they love.
For many winery owners, the last few months have been characterized by a renewed focus on making the business side work, as COVID-19 continues to eat into the tasting room and wine club sales that so many wineries rely on. While most jurisdictions have now eased many of their restrictions intended to flatten the virus curve, traffic at wineries is likely to be depressed at least through 2021 as Americans continue to be cautious about visiting public spaces. ISWR, the alcoholic beverages market research firm, predicts that global alcohol consumption will not return to pre-COVID levels until 2024.
The obstacle, then, for wineries is two-fold: On the one hand, no one knows when or how this crisis will come to an end. But on the other hand, it is imperative that wineries are prepared to spring back into action the moment it is safe and viable to do so.
That is why wineries must take steps now to make their cash flow and finances work in the near-term, while also being prepared for the future. As an accountant and advisor to clients in the wine industry, it is my job to help these businesses understand their financial situation and make informed decisions. Drawing from that experience, I have identified a number of strategies that may help wineries weather this storm.
(Re)Evaluate Your Tax Planning Strategies
Tax planning is always important. But if you have not evaluated your tax planning options recently—or at all—this is an excellent impetus to give things a good look. Even strategies enacted as recently as the beginning of the year may no longer be valid, given your business’s current position. Analyzing which opportunities to save on your taxes are available to your winery can pay off at a time when businesses need every penny they can get. To help get you started, here are a few big ones you should be aware of.
- R&D tax credit. It often comes as a surprise to winery owners that many activities that they are already engaging in to make and improve their wine may qualify for the federal government’s research and development tax credit, a program design to drive innovation by rewarding businesses who invest in it.
- To qualify, activities must be related to designing or developing new wine products. That could include anything from developing new bottling procedures or filtration techniques to implementing new irrigation or sustainability techniques to testing out new grape varietals. What does or does not qualify will ultimately depend on the business’s unique situation; consult an accountant experienced in R&D tax credit matters to determine what activities your business engages in qualify.
- What makes the R&D tax credit so valuable is that the Internal Revenue Code currently allows for a dollar-for-dollar reduction on your taxes. This is different, and far more impactful, than a tax deduction, which only reduces your taxable income in the eyes of the IRS. The R&D credit is by far one of the most generous tax programs out there, and with the potential payoff so huge, now more than ever wineries should consider conducting a thorough R&D analysis.
- IC-DISC. With demand overseas for great American wine pretty much a constant in the industry, wineries that export a high proportion of their product should consider taking advantage of the interest charge domestic international sales incentive, or IC-DISC. IC‐DISC lowers the exporter’s taxes by reducing the U.S. taxes on at least half the income derived from exported products from the normal federal rate of up to 40% to 23.8% or lower. To get these benefits, businesses must set up an IC-DISC corporation, a business that basically exists only on paper (although it must maintain its own bank account and accounting records), through which they sell products destined for overseas.
- Note that there a lot of details to the IC-DISC program, and there are professionals who work on just IC-DISC issues full-time. Contact an experienced international tax accountant to learn more about this strategy.
- Entity structure. How you choose to incorporate your business can have a major impact on the amount of income taxes owners ultimately pay. C corporations are relatively uncommon in the wine industry due to the double taxation arising from the tax on the corporation’s income as well as the owners’ individual income taxes. Limited liability corporations, or LLCs, are the traditional alternative, because income “passes through” directly from the corporation to the individual. But S corporations are quickly rising in popularity because the pass-through income is not considered self-employment income, meaning that owners do not have to pay payroll taxes or the 0.9% Medicare tax on income. Of course, each structure has its own benefits and drawbacks and these are just a few common examples. An experienced tax expert can help you make the right decision about how to structure your business for maximal tax benefits.
These three tax considerations just barely scratch the surface of tax planning. But I hope they illustrate the benefits of working with an experienced tax team to lower your business’s tax burden, keep more cash in your pocket, and enable you to continue pursuing your passion.
Utilize Economic Forecast Data
I know that with so many near-term issues confronting wineries right now, what may or may not happen six weeks—much less six months—from now can feel like putting the cart before the horse. A reported 100,000 small businesses have already shuttered due to COVID—a number which could include wineries, but in any case tells us the impact is widespread.
But if winery owners intend to be in business for the long haul, it is basically a truism that they must think about how decisions now will affect their business down the line. After all, making decisions that keep your business intact for a few months do not mean much if your business ultimately does not survive.
To be clear, I am not talking about predicting the future here—that is impossible. However, it is possible to create a range of the most likely scenarios to impact one’s business. Today’s data economy and advanced statistically methods have made possible accurate, relevant economic forecasting on the level of the individual business.
Now, sophisticated economic forecasts can get quite complex, but the basics at work are pretty easy to understand. First, the analyst takes inventory of all the potential economic variables that could impact a business. From there, they determine which could actually have a direct impact on the business. In the case of a winery, these variables might include consumption of wine, industry employment, and the cost of production. Then, using historical data and current trends, the analyst predicts how those variables are likely to change over a given period. Finally, you combine those projections and analyze, using statistical methods, their interplay. The result is a range of economic scenarios that your business is likely to see over a certain period of time.
In this way, economic forecasting helps leaders make informed, data-driven decisions rather than relying on one’s “gut” or responding to alarmist reporting about where the economy is headed. Now more than ever winery owners should think hard about how they make key business decisions as the ongoing COVID crisis continues to drive anxiety and uncertainty.
Michelle Ausburn is a Partner in Assurance and the Craft Beverage Industry Group Leader at BPM LLP.