Streamed: Tuesday March 15, 2022
Duration: 13 minutes
Language: English
About This Webinar
Learn more about claiming Research & Development (R&D) Tax Credits for your winery or brewery with this webinar from Moskowitz LLP
Webinar Transcript
Steve Moskowitz:
Hello, everyone. Thank you for joining us in our presentation today. We’re going to talk to you about wine industry research and development tax credits. Now, R&D/research and development credits apply to all types of industries. We could be doing this for dentists, physicians, high-tech people. All kinds of businesses qualify for research and development. One of the things that I like about it so much is that this is a credit, so although you do have an option, if you take the credit option, you get dollar for dollar. The difference between a deduction and a credit is this: if you have a $100,000 deduction and you’re in the 30% tax bracket, you save $30,000 of taxes. If it’s $100,000 credit, you save a 100,000 in taxes. We’ll talk more about that later on. This one is going to be specific to the wine industry, but again, it applies to many different industries.
One of the beauties about this, unlike most other things in tax planning, this does not require you to invest a penny in anything. What happens is you go in, you take a look at your expenditures for this year and the past three years, see if you qualify here, and if you do, you sit back and get your check from the government for the current year and possibly the last three years.
On that happy note, I’d like to introduce my friend and colleague, the head of our Tax Department, tax attorney and accountant, Cliff Capdevielle. Cliff, take it away for us.
Cliff Capdevielle:
Thanks, Steve. As you said, the R&D tax credit is a dollar-for-dollar return on your investment activity. This is available for the wine industry and it is not just laboratory research that qualifies. As we’ll see, it’s really any type of research activity, any type of development or design of new processes, new lines. These all qualify for the credit, and oftentimes, wine industry professionals don’t realize that these credits are available. It can make a big difference. Anytime that a business is developing new products, new processes, prototypes, all of these types of activities will qualify. We’re going to talk in detail about some of these activities.
Steve Moskowitz:
Well, Cliff, is this R&D credit only for large companies? How large or small can you be?
Cliff Capdevielle:
Steve, that is a great question. The answer is any company can qualify, not just the big research companies. You don’t have to be associated with the university or a large research lab, anything like that. These activities that meet this four-part test will qualify, whether you’re growing five acres of grapes, or whether you’re a Fortune 500 company.
What’s required to meet the test? There has to be some level of technical uncertainty. In other words, these would be processes, or products that are not completely known. Now, it doesn’t mean that it has to be patentable, or that you won the Nobel prize. Now, that’s not what we’re talking about. We’re talking about any activity that requires some process of experimentation where you’re comparing one process to another, you’re comparing one product to another, making a small change, and seeing how that affects the outcome, determining if that makes a difference in the quality of the product, or the nature of the process. We have to be technological in nature, but what we’ll see, Steve, is that it’s really not anything in terms of advanced science when we’re talking about technology. We’re going to be talking about differences in soil, differences in grape.
Steve Moskowitz:
You don’t have to be some laboratory in a white coat with state-of-the-art cutting research?
Cliff Capdevielle:
Not at all. That’s probably discouraged many businesses from claiming this credit is that they assume that it requires a publication, published research, or some a laboratory work. It really doesn’t. The qualified purpose can be any business purpose where you’re attempting to improve the quality of a product or improving a process that is relevant to your business.
Steve Moskowitz:
Cliff, what happens if you go ahead and you do your best and you just fail, your ideas didn’t work at all? Do you still get credit?
Cliff Capdevielle:
You absolutely do. The research, it’s not required that it’s commercially successful. It’s not required that your research is published in a journal, or anywhere else. It’s simply enough that you are attempting to improve a process, attempting to improve one of your products, and if that’s what you’re doing, then all of those wages and supplies are potentially eligible for the credit.
Briefly, we’re not going to get into the details of the math here, but the credit is 20% of the current year qualified research over the base amount. It’s a product of that fixed base percentage in the average annual gross receipts for the prior four tax years. That’s the base. It is a credit for increasing those research activities.
There’s another method it’s called the “alternative simplified credit method.” With that method, we calculate the company’s average qualified research expenses for the past three years and multiply that by 50%, and then subtract that result from step two, the current year qualified research expenditures, and then the credit is calculated multiplying that result by 14%. It’s not a dollar-for-dollar credit for every nickel that you spend on research, but it’s very valuable credit based on the wages and supplies that are used towards that research.
Let’s get into some examples. One common area of research on a winery is soil suitability. When we’re assessing a vineyard for soil suitability, we’re looking at the grade, the soil composition, water conditions. We also might be looking at any potential chemical hazards associated with this. Why is this important? Because to grow excellent wine, you need grapes, and that starts with the soil, so vineyards spend considerable effort to make sure that the soil is consistent with regard to the grade and water conditions, so any research associated with that was likely to be eligible for that credit.
Steve Moskowitz:
I just want to confirm, we don’t have to develop new products to take advantage of this credit?
Cliff Capdevielle:
Absolutely not. When we’re looking at this credit, we’re looking at the vine density, the trellis types. We’re looking at about how to design a vineyard that’s going to produce the best possible grapes. This is not rocket science. We’re trying to grow high-quality grapes. Uniform vine growth and fruit ripeness needs to be consistent in order to produce high-quality wine. That’s the kind of research that we’re talking about here.
With regard to grow the grapes themselves, obviously, wine has been grown and produced for thousands of years. In the past, before much was known about yeast strains, the natural yeast is what started the fermentation process, so really, there was no need to add a different yeast strain. But what’s been found over the years is that the more consistent the yeast, the more consistent the wine is, and so there has been considerable effort expanded to develop new strains of yeast, which produce better wine.
Couple examples here, might have a yeast that’s better at degrading malic acid. Malic acid can cause an imbalance between the sugar and acid content and the best-quality wines are controlled for those variables. In addition, you probably read about chemicals in wine that produce potentially health benefits, and so by controlling and changing the yeast strains, we can potentially change the chemical composition of wines, and potentially make them even more healthy.
Steve Moskowitz:
Cliff, I have a question. This is something I get from clients all the time, whether it’s R&D, or other areas, they always say to me, “Oh, it sounds like a lot of work. Is this worth my time?” How do we respond to that?
Cliff Capdevielle:
Yeah, so most of this data is being produced already, so it’s really a matter of organizing the data and not spending a tremendous amount of time with spreadsheets or anything like that.
Steve Moskowitz:
It sounds like pretty much you could go into a company and say, “Let me take a look at your existing records and I can pretty much figure it out on my own.” Is that correct?
Cliff Capdevielle:
Well, we start out with the records. As I said, the basis for the calculation is a combination of the wages associated with that business component that’s doing the research, and then we look at the supplies. Those are data points that the business is typically collecting already and we help organize those reports and create a presentation that is going to make sense in the event that the IRS looks at it and is a way for the business to better understand these business components and the availability of the credit.
Steve Moskowitz:
Cliff, if the IRS looks at it, what kind of documentation does the client need to claim the R&D credit?
Cliff Capdevielle:
What the client is going to need to show the IRS is that the expenses are directly related to qualifying research and that means that the wages and the supplies associated with that research are directed towards a technological improvement to a process or development of a new product.
Steve Moskowitz:
When you say the client has to present it to the IRS, you would actually go for the client present, not the client him or herself?
Cliff Capdevielle:
Yeah, exactly, Steve. As you know, this year, for amended tax returns claiming the credit, all taxpayers are required to attach a detailed report, which should be prepared by a tax attorney. It is signed under penalty of perjury. You want to make sure that all the ts are crossed and is are dotted and that every bit of detailed explanation is included with the claim.
That said, this is something that we do all day, and we will prepare those reports for you. We do need to work with the accountants and the others who are tracking payroll and the supplies cost, but the value of the credit is far more important than the number of hours that it takes to create these reports.
Steve Moskowitz:
When you say “amended,” that means going back to prior years. Just how many prior years can you go back to?
Cliff Capdevielle:
You can go back three years. This is typically a client comes in and they’re unaware that they were eligible for the credit, and we go back three years, we prepare the amended returns with that R&D tax credit report, which is attached to the amended return, and that is submitted. Typically, people worry about the audit risk. It’s typically less than 5%. It’s certainly worth doing in almost every case.
Steve Moskowitz:
Cliff, you said amending three years, so in reality, the client gets the benefit of four years. The current year is plus three years before that, is that right?
Cliff Capdevielle:
Yeah, that’s correct. In one fell swoop, typically, a client can pick up credits for up to four years.
Steve Moskowitz:
But if you take the R&D credit, does that mean you’re going to get audited?
Cliff Capdevielle:
Absolutely does not. As I said, the typical audit rate is less than 5%. The R&D tax credit is something that you have to be careful about, but that means hiring a tax attorney. You don’t want to try this on your own. It does require a significant number of calculations and preparation of some supporting material that would help you in the event of an audit.
Another example, people don’t think about this, but the grape harvesting itself could potentially produce expenses related and eligible for the R&D tax credit, so developing a new system, structures, any techniques in terms of creating a better wine would qualify. It’s very important that you have a consistent, reliable amount of sugar, for example, to yield sufficient alcohol for wine, and the grapes must be harvested at a precise time during the year. All of this is eligible for research, and obviously, just changing techniques with regard to harvesting could change the quality of wine, and therefore, be eligible for the R&D tax credit.
Steve Moskowitz:
Right, so we improve something, something that’s been done for thousands of years, and we get this credit.
Cliff Capdevielle:
That’s right, yeah. People think that you have to be in a lab in Silicon Valley, or doing biotech research at a university. It’s not true at all. Another example is crushing and pressing. We’ll say, “Well, people have been doing that for thousands of years,” so how?
Steve Moskowitz:
We probably all remember the I Love Lucy episode where Lucy was doing some winemaking.
Cliff Capdevielle:
Exactly. Wine is still made that way in many parts of the world. But if you develop any kind of automated sorting or crushing processes, new equipment related to that, all of these developments are potentially eligible for the R&D tax credit.
Steve Moskowitz:
That’s great.
Cliff Capdevielle:
Fermentation, of course, this is where really the art and science meet in a big way with regard to in particular yeast strains we talked about a little bit. With regard to fermentation, if we produce a yeast that is more predictable, in other words, more consistent, then we’re going to create a better wine. We’re going to be able to control the flavor more, the sweetness more, if we know exactly how that yeast works, so the development or improvement of any fermentation processes or techniques is typically going to be eligible for the R&D tax credit.
Clarification. Again, any changes here, any development then of new clarification methods or techniques in terms of filtration or other related processes are potentially going to be eligible for the credit. This, of course, is another large part of winemaking people think of it as a well-understood craft, but people are making small improvements every day, and all of these are potentially eligible for the credit.
Aging and bottling, also potentially eligible for the credit. Any development or improvement in the bottling or packaging processes are potentially eligible. In Napa Valley, for example, there’s been a lot of development with regard to wine caves, anything new or improved with regard to the-
Steve Moskowitz:
That has a nice sound to it, doesn’t it, “wine caves”? If you’re going to go into a cave, a wine cave sounds like it’d be top of the list to go caving.
Cliff Capdevielle:
Probably, yeah, if you’re going to be in a cave, you definitely want to be in a wine cave. Spoilage and prevention, of course, is a serious problem for all winemakers, so any techniques that are going to limit spoilage, prevent spoilage are eligible. For example, believe it or not, wineries are using ultrasound technology to potentially prevent spoilage. Microwave technology has also been used to kill microorganisms, which cause wine to spoil. Interestingly, you are able to use older barrels. If you do use microwave or other technology to kill the microorganism, you can reuse those barrels, and add interesting flavors to the wine. All of that’s going to be eligible for the R&D tax credit.
Steve Moskowitz:
Cliff, these things just sound absolutely wonderful, but in doing this type of stuff, sometimes I get the question, “This sounds too good to be true.” How do we respond to that?
Cliff Capdevielle:
Yeah, it really does take some convincing sometimes, Steve. As you know, we just went through with the employer retention tax credit, which was eligible, and still potentially eligible for some employee. When we show them the numbers, they really can’t believe it. They think that it’s too good to be true, but these are all incentives created by the federal government for the most part. Those states also have their own R&D tax credits. These are to encourage businesses to develop new products, develop new services, and all of that, of course, adds to the tax coffers of the federal government.
Steve Moskowitz:
Cliff, let’s go back a minute to those incentives because that’s something that I’ve talked about on the radio for years because there’s two purposes to the tax law. One, everybody knows about getting money from taxpayers, but the other one is in a democracy, the government can’t order us to do anything. How do they get us to do something that they want us to do that will be good to for the economy good for the country, but they can’t order us? They give us tax incentives, and that’s how the Fortune 500s and some very wealthy people make all kinds of money, billions of dollars with a B, and legally don’t pay any taxes. That’s the big deal about incentives. Cliff, is the R&D tax credit worth it?
Cliff Capdevielle:
It’s absolutely worth it, Steve. For wineries, and the wine industry in general, it’s been a big help, and it’s worth, as you suggest, billions of dollars. For the most part, it’s the big companies that take advantage of it. But as you know, Steve, you’ve been working with small businesses for the last 35 years, you know that they can leave a lot of money on the table. If they don’t have in-house tax attorneys or CPAs, they tend to skip over a lot of these issues and miss out on tremendous tax-saving opportunities.
Steve Moskowitz:
When you talk about tax savings, suppose you have this situation, suppose a client comes to you and says, “Hey, Cliff, I just started up a new business,” whether it’s a winery or something else, and when you start a business, usually you lose money, you don’t make money, say, “I don’t have any income tax liability. What good’s this going to do to me?” What do you tell them?
Cliff Capdevielle:
Yeah, good news, and this was new with the 2017 tax bill, and for years after 2018, you can use the R&D tax credit against your payroll cost. Everybody has payroll and you have payroll taxes that are due, whether you’re making money or losing money, and now, you can use the R&D tax credit to offset those payroll taxes, so even if you don’t have net income and you don’t have any income tax, this is still a very valuable credit in terms of offsetting payroll taxes.
Steve Moskowitz:
Cliff, another question I get all the time, people say, “Well, there’s all these benefits, but the government, sneaky through the back door, tries to get you with alternative minimum tax.” What about that?
Cliff Capdevielle:
Yeah, good news again. You do have to consider the alternative minimum tax, but this is still a valuable credit, even if you’re subject to the AMT.
Steve Moskowitz:
Are there any other benefits for claiming the R&D?
Cliff Capdevielle:
In addition to payroll tax and income tax, of course, the main benefit is that the businesses are improving their technology and improving their products and services, and typically, over time, money spent in improving processes and products is going to pay off in the long-term for those businesses, big and small.
Steve Moskowitz:
I think all of our viewers should be convinced just the incredible benefits that R&D provides them. Okay, how do I claim the R&D tax credit?
Cliff Capdevielle:
Steve, this is claimed in two way. As I said, we can go back three years and file them in a tax return that’s claimed on a form that’s attached to the return. The IRS now requires a detailed explanation with payroll records and supply records. If it’s a current-year return, we claim that based on the amount of R&D expenditures, we do a calculation to maximize the total tax savings between the R&D credit and the R&D expense. It really doesn’t add much more time or much more expense to the cost of a tax or return, but the tax savings, in many cases, are tremendous.
Steve Moskowitz:
This is just incredible. This is a perfect example of the system of incentives. What happens is Fortune 500 and wealthy people have an army of tax advisors saying, “Do this and this and this,” and they make this incredible money and they legally don’t pay tax on it. This shows the benefit because so many small businesses, the owner works so long and so hard and their life and their soul and their times, invest in the business, and they just don’t have time to even find out about these things. They wind up just turning their backs on all these tremendous benefits.
That’s why we offer these webinars to you. We just want to let you know that these things exist. Once you know they exist, then you can do something about it. One of the things you can do is you can call us up and say, “Hey, Cliff. Hey, Steve. I want to talk to you some more.” If you want to talk to either Cliff or myself on the phone, you can call us at (888) TAX-DEAL. That’s (888) T-A-X D-E-A-L, (888) TAX-DEAL, or email us at moskowitzllp.com. Stay tuned for lots of other really interesting topics that can save you a tremendous amount of money and take advantage of all these tremendous incentives that the Congress has given to us. Cliff, thanks so much for a great presentation.
Cliff Capdevielle:
Thanks, Steve.