The R&D Tax Credit for Wineries: Is It Worth It?

Aug 30

Let’s face it: if business were a family, taxes would be the least favorite member. Figuring out how to comply with all the rules and regulations is a headache. How much more will you owe the IRS this year?

The good news is that while taxes are unavoidable, there are valuable tax regulations that allow for deductions and credits to lighten your burden. By maximizing every allowable tax credit, you can save a significant amount.

In this article, we’ll focus on one particular tax credit: the R&D tax credit for wineries.

We’ll cover whether your winery qualifies, if it’s worth the effort, and how much you can potentially save by claiming it.

What Is the R&D Tax Credit?

The R&D tax credit is a way for U.S. businesses to save money on taxes by offsetting the costs of research and development. It's available to companies that create new or improved products or processes that enhance performance, efficiency, reliability, or quality.

You might be surprised to learn that this tax credit isn’t just for tech companies in Silicon Valley. It also applies to innovations in grape growing and winemaking. Yes, your winery could be eligible!

This credit reduces the taxes you owe to the IRS, which means you get to keep more of your money. However, the IRS has set specific rules about what qualifies for this credit.

What Qualifies for R&D Tax Credit?

In order to save money on taxes with R&D tax credits, you need to know what expenses qualify.

Here’s a breakdown of what counts and the specific criteria you need to meet.

The Four-Part Test

Tax guidelines require a four-part test to determine whether an expense qualifies for the R&D tax credit. Let’s go over each part:

#1 Section 174 Test

The Section 174 test determines if an expense is related to the winery’s business operations. In this case, the R&D expense must be related to your winery operations. If an expense fails to qualify for the Section 174 test, it means that the expense is already disqualified for R&D tax credits.

In doing the Section 174 test, ask yourself the following questions when evaluating expenses:

Is this part or related to my winery business?
Is this experimental?
Does this uncover information that would eliminate uncertainty about developing or improving wine products, processes, formulas, or techniques?

Head to the next test if an expense passes all of these questions.

#2 Technological Information Test

To pass this test, the R&D expense incurred must possess the following characteristics:

It is based on existing scientific principles and disciplines (e.g., biology, chemistry, engineering, physics).
Its experimentation involves an organized or systematic process (e.g., trial and error method, simulations, calculations, hypotheses testing, etc.).
It eliminates technological uncertainties in achieving the desired outcome.

For wineries, here are some examples of R&D activities that pass the technological information test:

Creating new fermentation methods using the principles of biology and chemistry.
Testing and experimenting with different fermentation techniques using a systematic approach.
Discovering new botanical techniques that can increase the yield of vineyard produce.

#3 Process of Experimentation Test

The process of experimentation test looks at how you conducted your experiments. For R&D expenses to pass this test, it must possess the following characteristics:

The research and experimentation process follows a systematic plan.
The research includes alternative methods, designs, or techniques that may produce the desired results.
The research follows the scientific method.
The research uses techniques to resolve uncertainties, such as trial and error or modeling.

For wineries, examples of R&D activities that pass this test are the following:

Trying different fermentation techniques to determine which technique yields the best wine quality.
Testing different botanical and agricultural methods to enhance grape produce and quality.
Developing new filtration systems that would enhance wine taste.

#4 Business Component Test

The final test to qualify for R&D tax credits is the business component test. This test determines if the R&D expenses are intended for a specific business component. We can do this by answering the following questions below:

Is it related to improving or developing a particular business component? (e.g., introducing a new wine product or flavor)
Does it improve or introduce a new technique, formula, quality, standard, or function to the business component? (e.g., using different irrigation and pruning techniques to increase grape yield)
Is this research aimed to improve or create a new business component related to the winery business? (e.g., selling no-alcohol wines or wines with minimal sugars and sulfites)

If an expense passes all the tests, you can deduct it as part of the R&D Tax Credit.

What Types of Expenses can be Included?

In terms of types of expenses, here’s a simple breakdown of the expenses that could qualify:

Wages

This includes wages of employees directly involved in research, like winemakers or vineyard managers, and those who support or supervise the research, such as cellar workers. If an employee spends 80% of their time on qualified research, 100% of their wage can count towards the credit.

Supplies

Eligible supplies can include:

Large-scale prototypes and pilot models
Tangible property used in research, excluding land or depreciable property, such as grapes, yeast, fining agents, corks, bottles, barrels, barrel staves, testing supplies, and experimental wine batches.

Contractor Expenses

Payments to contractors, like consulting winemakers, outside labs, or temporary labor, may qualify based on specific guidelines.

How Much Money Can You Save?

Now for the big question: how much can your winery save with R&D tax credits?

Typically, wineries can get a refund of about 10% of their qualified research expenses. This means if you spend $100,000 on qualifying R&D activities, you could get $10,000 back as a tax credit.

The more you invest in qualified R&D, the bigger the credit you’ll receive. Plus, if you increase your R&D spending each year, you could see even larger credits.

Downsides of Claiming the R&D Tax Credit for Wineries: Is It Worth the Hassle?

While the R&D tax credit can save you money, there are some downsides to consider, especially for small wineries.

Lots of Paperwork
One of the biggest headaches is the amount of paperwork involved. You need to keep detailed records of all your R&D activities and expenses. This includes tracking employee wages, supply costs, and contractor expenses. Managing all this documentation can be time-consuming and might require extra help.
Complex Rules
The IRS has strict rules about what qualifies for the R&D tax credit. Making sure you meet these rules can be tricky and might require hiring experts or consultants, which adds to your costs.

So is it worth it?

For small wineries, the effort and resources needed to claim the R&D tax credit might seem overwhelming. However, if your winery is doing a lot of research and innovation, the tax savings could be worth it. You need to weigh the potential savings against the time and effort required.

We recommend working with an experienced winery tax accountant to help you determine if the pros outweigh the cons.

Quick Winery R&D Tax Credit FAQ:

1. What If You Can’t Use the Credit Right Away?

If you can’t use the R&D credit immediately or completely, don’t worry. Any unused credit can be carried back one year or carried forward for up to 20 years—or indefinitely for California tax returns. This flexibility ensures that you can still benefit from the credit in the future.

2. Claiming Credits from Previous Years

Did you miss claiming the R&D credit in past years? No problem. You can typically amend your previously filed tax returns for up to three or four years to claim the R&D credit retrospectively. This means you can recoup some of the taxes you’ve already paid, putting more money back into your winery’s operations.

Need More Advice on Tax Credits For Your Winery?

R&D tax credits for wineries can help offset the cost of research, experimentation, and development to innovate and improve wine products.

However, to determine whether or not it’s worth the tedious documentation and additional outside costs, we recommend speaking with your winery accountant. There may be a few simple ways for you to track costs internally that don’t take hours and hours of your time.

As always, we’re here to help. If you’d like to chat more about tax credits for your winery, you can get in touch with us over on our Contact page, or check out our tax partnership team here.

Until next time!

Northwest Wine Accounting