New Tax Law Adds Nuances to Valuing Wineries

The Tax Cuts and Jobs Act includes special tax breaks for a number of industries, including the winery sector. This adds to the special differences experts need to consider when valuing these entities. During a webinar, Valuing Wineries in 2018—An Update, Keith Meyers (Perkins & Co.) and Chris Meineke (Brotemarkle, Davis & Co.) presented some key highlights of the changes for the wine industry. The new tax law:

• Expands the excise tax credit for all wineries. The legislation does away with the existing phaseout based on production size and allows all wineries to claim a credit of between $0.535 and $1 per gallon on the first 750,000 gallons of production. The total value of the full credit is $451,700 per year, based on producing the full 750,000 gallons.

   

• Allows sparkling wine to qualify for the credit. For the first time, sparkling wine is eligible to receive the tax credits mentioned above.

   

• Increases the alcohol by volume (ABV) allowed for the $1.07 tax rate from 14% ABV to 16% ABV. Wines with 14% ABV to 16% ABV are currently taxed at $1.57 per gallon and will now be taxed at the still wine rate of $1.07 per gallon.

   

• Increases the carbonation allowed in certain low alcohol wines (8.5% ABV or less) taxed at the $1.07-per-gallon rate from 0.392 to 0.64 grams of carbon dioxide per hundred milliliters.

In terms of other special considerations, Meyers, who is a contributor to What It’s Worth: Winery Value, points out that wineries are not like other manufacturing firms. The process of turning grapes into wine has a long lead time of about two years, so inventory turnover is very slow. It also takes a number of years for inventory to “stabilize,” which means you need to extend your forecasts past the stabilization period, which can be up to 10 years.  

Another factor to consider is that the inputs to the process are not typical raw materials—they are agricultural products that can be volatile due to the effects of Mother Nature. The quantity and quality of the inputs (grapes) can change materially from year to year, so you need to take that additional risk into account. In some cases, wineries have had to scrap as much as a year’s production because of problems with the grapes or the quality of the wine.

There’s one issue that can have a major downward impact on valuation—and it has nothing to do with the grapes. If the owner has plopped a million-dollar mansion onto the property and uses it as a primary residence, the value of the winery will be negatively impacted, Meyers points out. Potential buyers will then be limited to “lifestyle” buyers—those looking to live and work on the property in grand style. Better to have a modest structure on the property that the new owner can possibly convert to other purposes, such as housing for the vineyard manager or winemaker.