While financial experts expect to be pouring over the ramifications of the new federal tax law for years to come, those that serve the wine business are seeing several key changes so far. A few key changes are permanent, but a number of important modifications are to sunset by 2026 or 2027.
At the top of the list of improvements for the wine industry from the hundreds of pages in House Resolution 1, called the Tax Cuts and Jobs Act, are temporary relief from the estate tax and big changes to depreciation calculations, particularly for viticulture. Other significant changes in the law passed by Congress on Dec. 20 and signed by President Trump on Dec. 22 are lower corporate tax rates, which is causing conversations on how businesses are organized, as well as changes to accounting for profits, losses and costs.
But these and other nuances in the law come are making advisers caution clients to watch for clarifications from Congress and regulators over the next few years. Upcoming elections and the delicate majority in the Senate could also change things in the new tax law.
“If the midterms do not go well (for Republicans) and Democrats take control in 2020, they could overturn a lot of these tax laws,” said Jeff Gutsch, partner in the wine practice of Moss Adams. He is based in Santa Rosa.
A big improvement in the new law is the doubling of the lifetime exemption for the estate tax, according to David Pardes, a tax partner who leads PwC’s wine industry tax group based in San Francisco. (Here is PwC analysis of H.R. 1.) The rate for estate, gift and generation-skipping transfer taxes remains at 40 percent upon death or gifting, but the lifetime exemption that can be claimed upon death or gifts from 2018 through 2025 doubles to $11 million per person or $22 million for a couple.
"For most taxpayers, they will never end up in a position where they will have to pay estate tax," Pardes said.
But the 2025 sunset for the exemption has him and other analysts worried about "clawbacks" after that time. That's what could happen if a donor gifts up to the lifetime exemption while it's higher then dies when it lower, and the IRS claws back the gift amounts for a transfer tax. Accountants will be looking for legislative, regulatory and court guidance on this, Pardes said.
"It puts pressure on people in the industry to decide what they will do in the next seven years," he said.
Estate taxes have been a challenging hurdle for family businesses in the North Coast, as the company value may have risen to a level requiring various succession-planning methods over several years to avoid a big financial and tax hit on new owners in the next generation. Strategies include gifts to family members and to trusts.
APPRECIATING MORE DEPRECIATION
Another big boost for business is the move of bonus depreciation for certain property from 50 percent of cost back up to 100 percent of the cost for equipment and non-building assets, Pardes said. It's available for assets acquired and put into service from the fourth quarter of 2017 through 2022. Then it generally phases down 20 percent per year 2023–2026 from 80 percent to 20 percent.
What's key for the wine business in the new federal law is full expensing on the cost of vines in the year vines are planted rather than the year the vines are placed in service, up from 50 percent, which was placed into law a couple of years ago, Pardes said. That includes the cost of the vine plus the various preplanting and planting costs, which are capitalized into the vine.