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Managing the Inherent Financial Risks of Income Tax Depreciation for Small Vineyards in Oregon and California

Kent Fleming

Summary

I will report on the results of five OSU extension small vineyard taxation workshops I offered to Oregon and California winegrape growers. I carefully considered local conditions by creating relevant examples using different-sized vineyards (a 10-acre Oregon Pinot Noir vineyard & a 100-acre California Cabernet Sauvignon vineyard) along with their different production systems and cost structures. (While the workshop focus was vineyards, the underlying concepts apply to all types of US tree-fruit orchards.) IRS income tax implications for winegrape grower exposure to financial (and legal) risks and lower profitability are illustrated using two 10-year vineyard scenarios for both types of vineyard: one scenario considers production from purchased mature vines; the other, an envisioned vineyard on the same land, considers production from newly replanted grapevines.
Vineyard after-tax profitability varies significantly with the grower’s decision about how to depreciate vineyard assets. I developed an interactive spreadsheet model to illustrate the dynamics of the tax depreciation economic decision and to calculate the net benefit of choosing alternatives.
It is more profitable to use GDS to depreciate a mature vineyard. However, the depreciation of vineyard establishment costs is a more complex economic decision. Choosing to deduct (expense) vineyard establishment costs, rather than to capitalize them, can be more profitable but has serious inherent financial risks and deserves closer attention than most growers give to this decision. Using the currently available “bonus depreciation” option to capitalize preproductive expenses is always more profitable, but it is set to expire this year.

Details

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