As the tax rates on top earners continue to rise, many winery and vineyard owners are looking for new ways to reduce what they’re required to pay in taxes.
The good news is there are many tax planning opportunities for wine businesses at the state and federal levels, and if you’re willing to invest some time into researching and implementing them, you can significantly reduce your overall exposure. Let’s look at a few of the ways wineries and vineyards can reduce what they owe, both early on and as they continue to grow.
ENTITY STRUCTURE PLANNING
Good structuring is critical whether you’re starting a wine business from scratch or purchasing an existing business—not only from a tax perspective but also from a legal and business perspective. The entity type you choose depends heavily on your long-term goals for the business, and each comes with pros and cons.
On the tax side, C corporation structures are less common due to the double taxation that occurs. Limited liability companies (LLCs) have traditionally been the most popular vehicle, but S corporations are gaining ground as a result of the Affordable Care Act. Unlike an LLC, the flow-through income from an S corporation to an active shareholder isn’t considered self-employment income; as a result, it isn’t subject to self-employment tax or the additional 0.9 percent Medicare tax that went into effect in 2013.
On the other hand, LLCs can provide more flexibility to allocate losses to those members that funded the business, allowing them to use those allocated losses to offset their other taxable income. This can be a great planning tool at the inception of a vineyard or winery business, since in its first five years it may generate only losses as its vineyards come into production and its wine is aged.
Source: Wine Industry Network