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Cost segregation study can mean cash flow savings

Q: My family owns and operates a small winery in the northern part of the state. We are considering building a new building that would include a tasting room, manufacturing facilities and office space. What are the tax savings opportunities that we should consider?

A: New construction and new business opportunities in any business most always mean there is a need for tax planning to take advantage of any tax savings available. But because you are in a specialized industry, I asked Jennifer Lenzi in our Kennewick, Wash., office to offer some advice. Jennifer works with a number of wineries, and had these comments:

Whenever you have new construction, you should consider the costs and benefits of having a cost segregation study performed. A cost segregation study is a detailed analysis of all the costs of construction and proper classification of those costs into the various “class lives” allowed under the Tax Code.

Most commercial buildings are depreciated over 39 years, which means it takes a long time to deduct and receive the tax benefits of all costs of construction. Proper identification of costs that would otherwise be accumulated into the 39-year category may be identified as being eligible for a much shorter class life and consequently provide tax savings opportunities from faster depreciation. A cost segregation study accomplishes this goal by separating expenditures into appropriate asset classifications for tax purposes.

From your standpoint, the process is fairly painless administratively because you would have construction costs and blueprints provided by the contractor that would be available to use in analyzing the costs. In addition to segregating the costs to your best advantage, a quality consultant would also gather court cases and new rulings to back up classifications in case of an audit. A cost segregation study can result in a significant cash flow savings in the first five years, which is when you need it most.

Q: In addition to tax savings information on new construction costs, I would like to know the best way to track my inventory costs. Is there any software available that makes this process easier?

A: Another great question, and because of the special nature of your industry I again spoke with Lenzi. Here are her comments:

This is always a tricky subject, because many software packages used in the manufacturing process can be cost prohibitive for a small winery. First of all, let’s talk about which costs need to be capitalized. The tax code states you must capitalize your costs for the production period, which in the wine industry would be from the crush to the release date of the wine. You would include both direct and indirect costs.

Direct costs would include grapes, direct labor, employee benefits, crushing, and bottling and packaging costs. Indirect costs would include storage, depreciation, indirect labor, insurance occupancy, utilities and interest.

The specific costs that are not included are marketing, advertising, research and development, income taxes, and the special election to expense costs rather than use depreciation.

Some wineries use a Microsoft Excel spreadsheet to track their inventory costs; however, you can also consider using QuickBooks to automate this process. QuickBooks is a software package that is widely used in small businesses and has the capability to handle accounts payable, accounts receivable, payroll and banking. It also allows you to track quantities and costs using inventory items that can later be assembled into a finished product. So, you can still automate the tracking of your inventory costs as your winery grows without making the sizable investment of a high-end manufacturing program. It works especially well for wineries with annual production of 3,000 to 10,000 cases.

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To ensure compliance imposed by IRS Circular 230, any U. S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.

Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.

Have a question for Robbins? Email your question to news@idahobusinessreview.com. Enter “Talking Tax” in the subject line.

About Peter G. Robbins, CPA