How does a winery value its wines that it donates to charity, for tax deduction purposes?

WINE TALK
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We have a thread from a few years ago on here, and in the thread, @M.Kaplan explained that the standard is:

So, if I bought a bottle for $100, and it’s now worth $150, when I donate it it, I get a $100 tax deduction. Unless the bottle is related to the charity’s exempt purpose (e.g. a charity which teaches wine appreciation?), then I could deduct $150.

My question is, how do you value it if you are the winery who made the wine? Say Winery A has a bottle they sell for $50 direct to customers, and they donate a case of it. Can they deduct $600? Or can they only deduct their cost basis in the wine?

If it’s the cost basis, how does the winery calculate and show what the cost basis is? They have equipment, labor, facilities, utilities, cost of purchasing grapes, etc. etc.

Thanks in advance if anyone knows the answer.

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its their cost basis. they already have to calculate it as you only get a deduction for cost of goods sold for normal inventory. there isnt any extra work they need to do. basically book it as a sale at $0.

happy to expand the reply to explain the intricacies of UNiCAP and how some costs incurrred annually are capitalized into the value of inventory vs immediately deductible

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Thrill us with your acumen.

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chatgpt did a nice job. wine is basically a manufactured good. here goes:

To calculate the tax basis in manufactured goods, you’ll need to consider the cost elements that make up the basis for taxation. Here are the steps:

1.	Determine the Purchase Price: Start with the initial cost of acquiring the raw materials, components, and labor used to manufacture the goods. This includes the cost of raw materials, shipping, and any direct labor costs.
2.	Add Direct Costs: Include any other direct costs associated with the manufacturing process, such as factory rent, utilities, and equipment depreciation. These costs directly contribute to the production of the goods.
3.	Add Indirect Costs: Indirect costs, also known as overhead, should also be added. These are costs that are not directly tied to a specific product but are incurred as part of the manufacturing process. Examples include administrative salaries, office supplies, and factory maintenance.
4.	Account for Depreciation: Calculate depreciation on machinery, equipment, and facilities used in manufacturing. This is usually done using methods like straight-line or declining balance depreciation.
5.	Consider Labor Costs: Include the labor costs of employees involved in manufacturing, such as assembly line workers, supervisors, and quality control personnel.
6.	Include Other Expenses: Don’t forget to account for any other expenses related to production, such as packaging, quality control, and storage.
7.	Subtract Any Tax Credits or Deductions: If applicable, subtract any tax credits or deductions related to manufacturing that may reduce your tax liability. These could include research and development credits, energy efficiency credits, or location-based incentives.
8.	Adjust for Inventory Changes: If your inventory of manufactured goods changes throughout the year, make adjustments to reflect these changes in your tax basis. This can affect the cost of goods sold.
9.	Consider Special Rules: Depending on your location and industry, there may be special tax rules or exemptions that apply to manufactured goods. Consult with a tax professional or refer to local tax regulations for guidance.
10.	Maintain Records: Keep detailed records of all expenses and calculations related to the tax basis of your manufactured goods. Proper documentation is crucial for tax compliance and audits.

It’s important to note that tax laws and regulations can vary by location and may change over time. Therefore, it’s advisable to consult with a tax professional or accountant who is familiar with your specific circumstances and local tax laws to ensure accurate calculation of the tax basis in manufactured goods.

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Thank you!

I know a lot of winemakers on this board have donated to Falltacular and other worthy causes. Can you confirm this is the type of methodology that you have used?

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And with this approach, unlike a collector donating wines, you don’t have to get an appraisal of FMV, correct?

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Why would a collector need to get an appraisal for FMV? They can only use their cost basis (purchase price + storage costs). It’s the same basis that they would use to figure out their gains from selling a wine at auction.

Unlike when donating appreciated stocks, there’s no tax advantage or disadvantage in donating wine.

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From the thread I quoted originally, if you are donating $5000 or more in collectibles, you have to get a qualified appraisal of the FMV, and you can deduct the lesser of cost basis or FMV. So if you have a bunch of Marquis Phillips Integrity or something, you’ll get to deduct the FMV rather than the cost.

Under $5000, you don’t need an appraisal.

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Unlike the rest of the internet, the first thread may have some incorrect info. :wink: The 2nd thread (M. Kaplan’s post) is unfortunately correct.

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Yes— no special process needed. It’s just recorded as a zero sale and a reduction in inventory, which affects the “cost of goods sold” section of our Schedule C Profit and Loss tax return.

Edit: I get this question a lot, but no, as described above we do not need a donation letter from the charity. The “charity” doesn’t even need to registered — it’s just a reduction in inventory for us similar to “wine removed for personal use”, or “gifts” to friends and family, etc.

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Not similar unless de minimis ( the gift or personal use part). Although personal use for a wine business can really stretch to cover a lot of valid business purposes.

As Bruce Springsteen once wrote,
“Down there at the IRS, there’s just winners and losers, and don’t get caught on the wrong side of that line”

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Well that’s a good point. Do you know how “de Minimus” is might be defined? <1% of total inventory fir example?

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Here is info from the IRS website on employee benefits. You possibly could apply the same or similar rules to consider if an item is compensation to an employee or owner. While inventory is not specifically mentioned, im sure the IRS would consider a weekly supply of wine for personal consumption to be comp. However if you are doing a formal tasting at home for a valid business purpose, it is a business expense and the inventory shrinkage would just drop as a cost as you noted

In general, a de minimis benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. De minimis benefits are excluded under Internal Revenue Code section 132(a)(4) and include items which are not specifically excluded under other sections of the Code. These include such items as:

  • Controlled, occasional employee use of photocopier

  • Occasional snacks, coffee, doughnuts, etc.

  • Occasional tickets for entertainment events

  • Holiday gifts

  • Occasional meal money or transportation expense for working overtime

  • Group-term life insurance for employee spouse or dependent with face value not more than $2,000

  • Flowers, fruit, books, etc., provided under special circumstances

  • Personal use of a cell phone provided by an employer primarily for business purposes

In determining whether a benefit is de minimis, you should always consider its frequency and its value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.

Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.

Cash Benefits

Cash is generally intended as a wage, and usually provides no administrative burden to account for. Cash therefore cannot be a de minimis fringe benefit. An exception is provided for occasional meal or transportation money to enable an employee to work overtime. The benefit must be provided so that employee can work an unusual, extended schedule. The benefit is not excludable for any regular scheduled hours, even if they include overtime. The employee must actually work the overtime.

Meal money calculated on the basis of number of hours worked is not de minimis and is taxable wages.

Gift certificates

Cash or cash equivalent items provided by the employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.

A certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.

Achievement awards

Special rules apply to allow exclusion from employee wages of certain employee achievement awards of tangible personal property given for length of service or safety. These awards

  • Cannot be disguised wages

  • Must be awarded as part of a meaningful presentation

  • Cannot be cash, cash equivalent, vacation, meals, lodging, theater or sports tickets, or securities.

In addition, there are other requirements specific to achievement and safety awards and there are dollar limitations that must be met. See Publication 5137, Fringe Benefit GuidePDF or Publication 535PDF for more information.

How are de minimis fringe benefits reported?

If the benefits qualify for exclusion, no reporting is necessary. If they are taxable, they should be included in wages on Form W-2 and subject to income tax withholding. If the employees are covered for Social Security and Medicare, the value of the benefits are also subject to withholding for these taxes. You may optionally report any information in box 14 o

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Thanks Tony. I will ask my tax accountant to see how this applies to a P&L statement (I do not yet need to declare a salary to my self or my wife, and all the assistance I get for web design, label design, sales consultants, and these sort of expenses are all contract invoiced and paid).

$100 sounds reasonable and good to know for gifts and such.