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w w w. v w m m e d i a . c o m J a n - F e b 2 016 | V I N E YA R D & W I N E RY M A N A G E M E N T 1 4 9 the year paid rather than capitaliz- ing them as a component of inven- tory. Estate-farming expenses aren't deducted until the inventory is ulti- mately sold. Depending on the time frame in which a taxpayer ages and ultimately sells his inventory, deduct- ing these costs up front could accel- erate the deduction by one to four or more years. If you have examined your overall accounting method and determined that the other would be more advan- tageous, you are not out of luck. You can choose to change your account- ing method by filing Form 3115 with the IRS. Various requirements apply depending on the type of change, so work with your CPA to determine whether a change is feasible and what you need to do to execute it. FARM INCOME AVERAGING Qualifying taxpayers may elect to have their current-year farming income (in whole or in part) spread evenly over the prior three tax years. This can mitigate the tax impact of higher-earning years, ideally keeping taxpayers out of the top tax bracket in the current year. This is especially helpful now that top individual tax rates are higher than they have been in the past. Farm income averaging can be challenging for taxpayers with mul- tiple activities – for example, a com- bined winery and vineyard operation. To take advantage of this strategy, you need to be able to determine the exact amount of income that is attributable to farming and therefore eligible for averaging. IC-DISCS As international markets for U.S.- produced wines continue to grow, many wineries have expanded their sales overseas. If you export your products, you may benefit from forming an IC-DISC – that is, an interest-charge domestic interna- tional sales corporation – which yields permanent tax savings on export income. IC-DISCs are paper organizations that are not taxed at the federal level. They have neither employees each state where you have opera- tions, then work with a CPA to reduce what you owe. On the plan- ning side, understand what you are getting into from a tax perspective before you commence operations in a new state, especially if your tax liability could tip the balance one way or another. Note that filing in another state isn't necessarily a neg- ative, since California is such a high- taxing jurisdiction. In some situa- tions, it may make sense to create a filing obligation in another state, pull- ing the income out of California and potentially reducing the taxpayer's overall tax liability. PLAN AHEAD The most important takeaway is to start planning early so you can adequately account for any chang- es you want to make or opportu- nities you want to seize. While many of the opportunities outlined here are limited to either wineries or vineyards, integrated winery- and-vineyard operations are often in a position to take advantage of both. Entity structure and choice of accounting method are fundamen- tal options that will impact your tax exposure; so invest time up front on those decisions, particularly in advance of a transaction or the for- mation of a new business entity. Evaluating your tax strategy now is important, but just as important is reevaluating it regularly. Work with your CPA and other advisors to develop a strategy, implement it properly, and prepare for tax law changes and new opportunities. Michael Ricioli, CPA, of Moss Adams LLP, has been working in public accounting since 2000. He leads the firm's tax practice for the wine industry and oversees his clients' complex multistate tax returns, assists with quarterly tax projections and continually seeks out applicable federal and state tax credits. He can be reached at 707- 535-4152 or michael.ricioli@moss- adams.com. Comments? Please e-mail us at feedback@vwmmedia.com. nor offices; rather, they exist solely to collect a sales commission from the exporting business. Once they have collected this commission on the exporter's international sales, they distribute the income back to their shareholders (generally the same individuals or entities that own the exporter) in the form of qualified dividends. Because qualified divi- dends are taxed at a lower rate than ordinary income, IC-DISCs yield a tax rate reduction of approximately 16% at the top bracket. Forming and maintaining an IC-DISC does involve additional paperwork and the involvement of attorneys and other advisors, so you will need to put some advance plan- ning into this strategy if you think your business could benefit from it. STATE TAX CONSIDERATIONS At the state level, there are still more tax planning opportunities available to winery and vineyard owners who know where to look. California offers a partial sales and use tax exemption on the pur- chase of equipment used in manu- facturing, which includes wineries' crushers, fermentation tanks, bottle washers, laboratory testing equip- ment and more. It reduces the tax rate on these purchases to approxi- mately 3.3% compared with the state's standard 7.5% rate. So if you spend $200,000 on qualified equipment, you'll see a tax savings of $8,400 using the partial exemp- tion. California also permits faster depreciation (five years instead of 10) on vines replaced due to Phyl- loxera (after 1991) or Pierce's dis- ease (after 1996). On the other side of the coin, states have become increasingly aggressive about how they tax wine businesses and have proven creative about how they do so. Solicitation of sales, for example, is generally shielded from state income tax under Public Law 86-272, but states have created franchise taxes, margin taxes and gross receipts taxes that work around this law. To plan properly for these state taxes, you need to understand what activities may be taxable in