While this is not an exhaustive or all-inclusive list of the potential tax advantages of owing a vineyard, following are some of the most relevant potential advantages. Contact your tax advisor for details specific to your situation.
Vineyard owners can deduct ordinary and necessary expenses as farm/business expenses as long as they can provide intention to make a profit. A wide variety of farming-specific and other operational and administrative costs qualify as ordinary and necessary farming expenses. In addition, agricultural businesses have many special deductions not allowed for other businesses.
Vineyards often have significant investments in various types of assets (real estate, farm equipment and machinery, vineyard development, etc.) Specific to the growing of grapes, there can be significant investments in trellis and irrigation systems, rootstock and vines, fences, roads, wells, drainage, etc. The IRS has many methods for depreciating property, some of which can create significant tax breaks. IRS Code Section 179 accelerated depreciation and Section 168K bonus depreciation are examples of depreciation advantages that could be available. However, be advised that the State of California has different tax rules and does not necessarily conform to IRS depreciation methods.
if deductible expenses are more than income for the year, the vineyard owner can create an NOL. NOLs can be carried back two years or carried forward for 20 years. Therefore, it may be possible to carry back farming loss in order to receive a refund of taxes paid in previous years. An NOL (that is not elected to be carried back) can be carried forward in order to offset future income. In addition, previous IRS rules allowed for the carry back of farming losses up to 5 years previous. While this carryback provision is no longer applicable, it shows some of the previous benefits that the farming industry has received from the IRS. However, be advised that the state of California does not necessarily conform to IRS NOL rules.
certain small vineyard owners could qualify to use the cash method of accounting instead of the accrual method, which could create tax opportunities.
due to the capital investment sometimes necessary in vineyard activities, vineyards could have considerable real estate holdings to borrow against.
expenses encountered for soil and water conversation required by government agencies, as well as to protect endangered species, can be deducted and not capitalized.
many growers who can’t use the cash method are still able to currently deduct post-harvest and pre-bud break costs.
while land costs normally cannot be depreciated or amortized, there is a provision specific to the growing of grapes whereby it may be possible to segregate out the right to use an AVA Designation as an intangible asset subject to amortization.
if a taxpayer qualifies as a farmer, they could be subject o more favorable rules in regards to the payment of estimated taxes.
certain farmers are able to elect to use farm income averaging – the ability to average some or all of the current year’s farm income by spreading it out over the past three years.
some farmers may be able to claim a tax credit or refund of federal excise taxes on fuel used for farming purposes.
Significantly reduced property taxes for qualifying properties.
Farm equipment, machinery and more.
under Tax Code Section 197. This process requires a qualified accountant and appraiser. A sophisticated and under-utilized approach to tax planning is an American Viticultural Area (AVA) 15-year amortization under Tax Code Section 197. This process requires a qualified accountant and appraiser who have experience with the amortization of AVAs.
When a vineyard is purchased (within an AVA), a portion of the purchase price allocation can be defined as intangible AVA value. For 197 purposes, the right to use an AVA designation is a license, permit, or other right granted by a governmental unit and is not an interest in land. Therefore, the right to use an AVA designation and a portion of the vineyard’s purchase price can be amortizable.
An interest in land is not a 197 intangible. However, the AVA designation applies to one of the uses of a particular crop from any land within the designated AVA, which is further processed into a finished product.
The national office of the IRS released a Chief Counsel Memorandum (CCM) concluding: The right to use an AVA designation is a 197 intangible and the amount of the vineyard's purchase price allocated by Taxpayer to the right to use the AVA designation is an amortizable 197 intangible.
The first step in claiming a deduction for an AVA is determining the value of the AVA. A competent, well-supported valuation is an important part of supporting the value allocated to an acquired AVA and the corresponding amortization deduction. The good news is that for those who have acquired vineyards and did not assign value to an AVA, an automatic change in method of accounting is available.
With the help of experts, my clients and other vineyard owners have successfully claimed amortization for AVAs. I cannot give recent valuations or provide estimates (I am not an ASFMRA Appraiser), but I can warrant that the value of this technique is tremendous. Even in outlying AVAs without AVA-designated brands, I have seen significant price allocations.
Vineyards in the right location can be a very good investment for income and appreciation. They also offer tax advantages including depreciation, deductions, and reduced property taxes.
Vineyards are capital intensive and annual costs can be highly variable due to weather. Typical farming costs for the Paso Robles Region range from $4,000-$8,000+/ vineyard acre annually depending on location, vintage weather conditions and winegrowing goals. Most healthy vineyards in the area yield 3-5+ tons per acre and bring in $1,000-$3,000+ per ton. Ultimately, the success of a vineyard comes down to proper alignment of fruit quality and quantity with farming outlays.
Lenders look at three main areas:
Most vineyard lenders require 35% down on the property plus working capital.
Vineyard properties do not qualify for a typical mortgage because the land/agriculture is a significant component.
As with most vineyard/ag properties, it takes a highly qualified buyer and knowledgeable lender.
With 20+ years in business, count on me to provide an extensive list of lender resources.
1. Block Map with acreage (row/vine count if possible)
2. Breakdown (year planted, variety, rootstock and clone, please list nursery(s) sources)
3. Historical yields, tons per variety
4. Farming company or owner-managed?
5. Farming costs
6. Frost protection information
7. Grapes sales, historic price/ton breakdown, plus future commitments
a. Source(s) and capacities (wells, storage tanks) and testing reports
b. Water quality reports
c. Shared water agreements
d. Water System diagram
e. Well drilling/test reports
f. Drainage installation and maps
g. Government Regulations (SGMA and local agencies)
9. Estimate of additional plantable acreage
10. Pests and diseases (past and present)
a. Virus and Fungal Tests
b. Pesticide Use Reports
c. Nematode Tests
d. Is bird control practiced? How?
e. Map of fencing
11. Vine tissue and soil nutrition reports
12. Permits and Certifications (County Hazardous Waste, Water Board, APCD, SIP, etc.)
13. Financial information and ideally a Proforma
14. Furniture, Fixtures & Equipment (FF&E) list with estimated market value
15. List of items that won’t be conveyed in a sale
16. Any additional vineyard information?
*This list is provided by Vineyard Professional Real Estate as a starting point and NOT an exhaustive list! Vineyard Professional Real Estate expressly disclaims any responsibility for action taken in reliance on the information. It is the responsibility of the Buyer and Seller to undertake due diligence and seek proper advice and guidance from trusted advisors.*
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If you're looking for a proven Paso Robles vineyard and winery expert, Jenny Heinzen is prepared to listen, share expertise, and deliver on your goals.