We are choosing to use $1000 as a break between capital and expense.
Based on that:
I would assign new barrels (~$1100) as capital items with a short lifetime (3 yrs) and depreciate;
and normally would assign used ones as small tools/equipment and simply expense them.
If we buy additional oak to use in used barrels then it should be manufacturing supply, as would Yeast, and fermentation supplies.
Since we are a “manufacturing enterprise” I should have to assign the value of the oak to the cost of goods sold rather than just deal with it as overhead ?
If I start in New Oak and rack to used, do I assign pro-rata depreciation to the batch ?
We treat all Oak as capital goods. I’m not sure setting a $1000 break is correct, nor viewing purchased new oak differently than purchased used oak. Heck, you can buy new American Oack barrels for $350. But I could be wrong.
Since all our oak is capital, we don’t have an issue of assigning some percentage of oak as cost of goods to particular vintages or lots. We just depreciate them like any capital equipment.
One thing to note about barrels - they are exempt from unsecured business property tax for (I think) up to 6 years old.
Never been anywhere where they looked at oak bbls as anything other than a capital expenditure. I think you can choose your own depreciation schedule (up to 5 years) as long as you’re consistent year over year, but could be wrong on that.
I would agree that most adjuncts belong in a “fermentation supplies” or “cellar supplies” expense account. Reconditioning a barrel with fixed new inserts might be tougher to assign…I would probably consider that cap?
For internal use, I would suggest finding a way to work it (it being the breakdown of new and used oak and length of time used, hence share of depreciation expenses) into your “internal COGS” for your individual products so you have a reasonable and accurate idea of what your real costs are to produce each wine (and oak and fruit costs are the two biggies here), but I think from an IRS point of view it isn’t necessary.
Your last question is getting a little too intricate. May I suggest the KISS method?
Disclaimer: Although I have taken ACCT classes, I am not an accountant, nor do I or have I dealt with it closely on a day to day basis as a winemaker (ie entering QB data or keepig a ledger), although I am closely involved in budgeting.
Sheldon, one should always depereciate barrels in the pro rata since it would be rare that you would purchase your barrels at the start of your fiscal or calendar year. I would not incorporate that expense as overhead, but rather as an expense to offset revenues from a tax perspective and a figure to determine your net income. Realistically speaking, the amount of money used for a barrel would be quite low to include in the “Process cost” of your product. It is part of the process, but in speaking to Le Cadeau’s accountant about five years ago, he depreciates the barrels on a 3-5 year basis includes it in the income statement. Hope that helps.
I think there is a little confusion here between your tax accounting and management accounting. If you are submitting you accounts on a cash basis, the barrels are depreciated over 5 years-new or used, regardless of cost. It is also important to keep track of your “material supplies” grapes, labels, bottles, yeast, etc for each bottling because you can only deduct the expense once you have sold the wine, so setting up Quickbooks sonthat each time a bottle or case is sold the cost is moved from the balance sheet to the P&L to be expensed. You may also just keep track of these expenses in a spreadsheet and have each year’s starting inventory bulk and bottles and then the ending inventory and you can calc out what you can allow against income for taxes.
It’s good practice for your own accounting and accurate COGS is to allocate some of your over heads like rent and barrels to the actual cellar costs by bottling (I do it by lot and then combine after blending. This however is totally different than the statutory accounts.
I have a nice little spreadsheet for the materials supplies, send me an email if you would like a copy.
Disclosure…yes I am ex-PW and Coopers &Lybrand and an MBA in finance, so apologies if I am showing my geekiness!
Cher Kathleen…rest assured that you are NOT exhibiting a trace of geek-i-ness, just some excellent accounting chops. With regard to depreciation, I’ve observed accelerated, straight-line, and even 100% in Year 1 at various wineries. I also use an Excel spreadsheet to calculate COGS for each wine, beginning and ending Inventories, and wine samples (which can be expensed and charged against Inventory, but you already knew that). Finally, I classify all barrels–be they purchased new or used–as capital assets.
Hey, if it weren’t for accountants, we wouldn’t have to worry about bein’ bankrupt, right?
I’ve taken barrels as a one year, section 179 depreciation when it “made sense” and I had income to cover the deduction. That could be a good option for used barrels that don’t cost that much. Who wants to depreciate a $50 asset for 5 years?
The COGS accounting I hate is dealing with utilities. Now how much of those electrical bill in 2010 applied to production of our 2009 and 2010 wines, and how much was general usage? Ugh.
The question of capitalization (and hence requisite depreciation) is what I was addressing.
There are generally items which require tax accounting capitalization (land and buildings) and some which are optional depending on useful life and cost. Specific capitalization of brand & good will (artwork and label design) and vineyard development is clear.
As Brian notes, when you have a used bbl for $50-100, its should probably be expended, vs capitalized. As long as you are consistent in your definition of capital with respect to IRS criteria and internal policies it should be fine (full disclosure my evening MBA was ca '00, accounting 101 was '97 )
I’m setting up “wine sales” as the income account, and accruing costs of fruit, fermentation/aging supplies, bottle, label, cork and foil to the inventory. We also have some startup bulk red wine purchases which will be aggregated from the cost of wine etc.
So far as we are “a home based business”, I plan to take the home business deductions for overhead items such as power and allocated space. Since we don’t have “employees” we don’t have to pay for our labor, and accrue those costs.
We keep it simple: barrel purchases go in to the COG and expensed when the goods are sold. When we sell them, if we can sell them, it’s just a small miscellaneous sales income. Seems to work.
That was just a figure for 3 or 4 year old used barrels that wineries sometimes buy when they run short of their own used inventory. We haven’t bought used barrels in a long time, but we do sell ours - and often for $50.
I think there are actually a couple answers here. If you use the barrels over multiple vintages then you have a capital good which needs to be depreciated or used up over a specific lifespan (think something like a crusher destemmer). If you routinely use a barrel for one vintage and then dispose of it as a “used” barrel as Brian mentioned then you have a manufacturing expense. This would apply even if the wine stayed in the barrel for multiple tax periods and then was disposed of by sale or by destruction after the wine was sold.
Since per Brian the value of a used barrel is pretty nominal, I would argue that the useful life is the live of the vintage in the barrel.
The above is very consistent with the matching principle in accounting, which quite frankly is one of the core fundamentals to look at when characterizing a transaction.
Inasmuch as you can track individual barrels (numbering or naming system) and making sure you are consistent, I can’t think of a reason not to expense them. I am remaining silent on the IRS treatment because I haven’t done any research. But if I owned a winery I would argue the above every time and would treat it as an expense until told not to by them. Then I would take them to tax court. And beat them.
I do have a Masters in Accounting and a CPA after my name, even though I don’t practice. FWIW.
A new barrel is sort of like a new car in the sense that it loses a lot of value very early (as soon as you fill it - akin to driving it off the lot) and then that trend slows. You could probably sell a one-year-old French barrel from a top cooper for $400-500 (having lost 50-60% of its value in a year). I used to sell a lot of 3-year olds for $120 - 225, with white barrels being more valuable used than reds. I have purchased used barrels for as little as $20 (very old neutral whites).
I think we would all love to try what you are suggesting…is this to be construed as advice from our adviser ? What is your home address and SSN # again ?
FWIW, I used to work for a man who was the CFO of a major tech company in Silicon Valley before becoming a vintner. He actually did go to court with the IRS over a few things specific to the wine industry (and beat them). This wasn’t one of them…he capitalizes his barrels and depreciates them like everybody else…
Sheldon,
Ive watched over the last year or so some of your questions as you begin this great fun adventure… My only advice is seek good advice. Spending the time and money with a CPA that specializes in our industry is money well spent. This is voice of experience, they can set you up with a chart of accounts that work for a winery, make sure you not only have good internal controls but are following the letter of the tax law, and ultimately save you a ton of cashola down the road. I don’t have any recommendations for CPAs in CA, but bet if you asked here, there would be one or two that surfaced as pro’s
Best wishes and happy bean counting.
Linda
Linda has great advice - except where Sheldon and I are, there are NO accountants who specialize in wineries.
Sheldon - mine is pretty good, and now has 7 years of experience working with a small winery. He’s at Almaden and Capitol, so not too far a drive for you. We actually set most everything up ourselves, Stefania was an accountant, so we had a chart of accounts that worked. When we had questions though they were able to walk us through things. Barrels was one of the questions I had, and it was exactly the same question you had. Here’s how the dialog went:
Me :“Are barrels to be depreciated or are they a COGS?”
Him: “What do they cost?”
Me: “$1100”
Him: “How many times do you use them?”
Me: “Three max, sometimes just twice.”
Him: “What are they worth after you use them once?”
Me: “$100-$150”
Him: “What are they worth after you’ve used them twice.”
Me: “Do you want some? I can drop off as many as you want at your house for free.”
Him: “That’s a COGS.”
I’m not so sure being close to a good winery CPA is important, I would imagine that with technology you could work long distance. In my opinion, the most important item to look for in a CPA or Attorney for that matter is experience ( and a lot of it ) in the winery business specific. There are just too many odd things we face and deal with, that only someone with time in the saddle can see coming or prevent. There are folks that will tell you they are “experts” in our field, but be wary, without good recommendations, run like hell. Up here for example, we have Irvine and Co, Jack Irvine that does a lot of us, it’s their specialty - I refer to him as the “gold” standard and refer all my Clients that direction. The same holds true for Attorneys, we have a couple here, but mainly Davis Wright Tremain, Jesse Lyon is the go to guy. Money spent during the start up, and it should be BEFORE you commit, is far more important than where you get your fruit, what kind of bbls you choose or how natural your wines are … it just seems very risky to me to put the cart before the horse with something so important.
Again, I would think with a little research you can find someone with the knowledge to protect you, your assets and your brands.
Cheers !
Linda
Oh Sheldon, I saw on another post you asked about using volunteers in a tasting room. I would not do so for a variety of reasons, but check with your Insurance company and see if your liquor liability will cover a volunteer ? Also, if they get hurt, who pays ? Certainly not your workmans comp carrier and I’m not sure but I think there might be something in the tax code about “barter” for goods ? Another good question and reason for a competent team of professionals.
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? What is your home address and SSN # again