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Potential Vineyard Tax Savings

Potential Income Tax Savings for American Viticultural Area Designation

A new federal tax ruling could result in big tax savings for many Napa Valley vineyard owners. The Internal Revenue Service (IRS) recently issued a memorandum recognizing the allocation of land costs to an American Viticultural Area (AVA).  If such land was acquired after August 10, 1993, the part of the cost attributable to an AVA is an intangible asset which can be amortized over fifteen years.

Even prior to the IRS memorandum, Brotemarkle, Davis & Co (BDCo) had been assisting vineyard owners in allocating AVA costs at the time a property was acquired, if an AVA value was readily available at the time of purchase. 

In this ruling, the IRS has further clarified that vineyard land owners are entitled to deduct AVA values retroactively, as long as the vineyard was purchased after August 10, 1993.  Taxpayers who own such land, but who have not taken advantage of the amortization deduction in the past, may now make a retroactive allocation of land costs to the AVA.   An automatic change of accounting method is available by filing IRS Form 3115 with the next tax return.  This change will allow taxpayers to catch up on any missed deductions related to the AVA.

The first step in the process of claiming a deduction is to determine the amount of the land cost allocable to the AVA.  Since it is possible that the IRS may challenge the valuation, we recommend obtaining a professional appraisal that details the value of the AVA.  The IRS can disallow these deductions unless it is clearly demonstrated that a premium was paid for the designation.  BDCo is currently in the process of developing values for various local AVA’s that can withstand an IRS challenge.

Please contact us if you would like assistance with deductions for AVA costs on vineyard land that you own.