It takes a lot of time, money, and effort to produce the perfect bottle of wine. Those in the winery and vineyard industry often spend years refining their process and perfecting their product. It’s not uncommon to implement several new techniques and technologies along the way as wineries figure out what works best for their business. Fortunately, businesses in the wine industry can write-off much of this expense as research and development (R&D).
One of the largest tax incentives offered, America’s R&D tax credit saves businesses around the U.S. a significant amount of money each year. Despite massive potential tax savings, many wineries and grape growers still do not take full advantage of this credit. This isn’t because they don’t have the documentation to support their research; many simply do not know which of their activities fall under R&D.
About the R&D Tax Credit
The Research and Development Tax Credit is a government-sponsored tax incentive for businesses conducting research and development in the United States. Businesses throughout the U.S. can apply for a dollar for dollar reduction of tax for qualifying research and development expenses. Every year, the U.S. government spends around $10 billion on this important tax incentive.
When the Internal Revenue Service (IRS) released new Treasury Regulation Sec. 1.174-2 on July 21, 2014, many U.S. based wineries may also qualify for state credits as well. 70% of all U.S. states offer tax credits for R&D.
In order to qualify for the federal R&D tax credit, activities must pass the tax code’s four-part test.
- Elimination of Uncertainty – Can the business prove that it’s attempted to eliminate uncertainty about the development or improvement of a product of service?
- Process of Experimentation – Can the business demonstrate that they’ve fully evaluated alternative methods for achieving the desired result?
- Technological in Nature – Are hard sciences such as physics, chemistry, biology, or engineering used in the experimentation process?
- Qualified Purpose – Is research conducted to create a new or improved product or process with improved performance, function, reliability, or quality?
In order to take advantage of the R&D tax credit, businesses must provide supporting documentation for each segment of the four-part test criteria. Businesses also need to identify the expenses of each activity. This might be the cost of new equipment, supplies, or the salaries of those responsible for performing the activity.
Qualifying Research Activities
Many wine-making and vineyard activities qualify as research and development. In fact, almost any activity aimed at improving the taste and quality or manufacturing process of wine could qualify, even if the business didn’t reach their desired result.
Optimizing vineyard plots through irrigation improvements, soil analysis, trellis development, and other testing and improvement efforts all qualify as R&D. Additionally, the development and improvement of bottling and packaging processes, experimentation with new ingredient combinations, flavor and aroma profiles, and economic experiments aimed at improving efficiency also qualify.
Experienced Wine Industry Accountants
While the R&D tax credit offers significant discounts for those that qualify, businesses in the wine industry must take care when calculating these expenses. The IRS has strict requirements about what percentage of R&D expenses a business can claim. It’s best to speak with a qualified wine industry accountant.