R&D tax credit for vineyards and wineries affected by smoke exposure

For the most up-to-date content on recent fires, see our Tax Planning Guide’s Disaster Relief section.

A version of this article was previously published on Wine Business.

For vineyards and wineries, 2020 has witnessed unprecedented wildfires. In California, a record was set with more than 3.7 million acres burned. Similar devastation occurred in Oregon and Washington with over 1.6 million combined acres burned. Unfortunately, wildfires still continue to ravage the West.

With fire comes smoke bringing an imminent threat of smoke exposure to grapes. Some vineyards and wineries will forego their 2020 vintage altogether due to smoke exposure; others will attempt to produce wine using new methods or techniques to mitigate smoke exposure.

Those who attempt to produce a 2020 vintage should consider the potential of research and development (R&D) tax credits.

Effects of smoke exposure

While a vineyard or winery may not be directly impacted by a wildfire, smoke exposure to grapes is still a concern. Smoke exposure can cause a substantial increase in volatile phenols — such as guaiacol and 4-methylguaiacol — which are absorbed through grape skins and can result in wine characterized by overwhelming smoke and ash traits. It’s unknown how much smoke exposure is considered causal for unwanted traits, but the risk increases with continual or multiple exposures.

Testing issues

Further complicating the issue, assessing whether grapes have been affected by smoke exposure isn’t measurable by the naked eye.

Lab testing is one method to measure the levels of volatile phenols, but labs are currently inundated and have backlogs of samples to test — leaving many vineyards and wineries in limbo as they make decisions to harvest and produce wine.

Small-scale fermentations and sensory and chemical analysis can also help assess for smoke-exposure characteristics.

Neither method is fool-proof; when determining the impact on the resulting wine, there’s still uncertainty in how to treat grapes with smoke-exposure defects.

R&D tax credit and deduction

The R&D tax credit provides companies a dollar-for-dollar tax savings that directly reduces a company’s tax liability — in general, this includes approximately 10% of qualified expenses. If the R&D credit can’t be used immediately or completely, any unused federal credit can be carried forward for up to 20 years — or indefinitely for California R&D tax credits.