The R&D Tax Credit Aspects of Modern Wine Production



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Wine-Production
        Although wine making is one of the world’s oldest professions, new technologies and unique approaches to the cultivation and fermentation of grapes are constantly being developed.  Innovation is common from the start of operations with the design and the development of the wine cave and it continues throughout the growing, harvesting, and aging processes.  Even bottling, packaging, and shipping methods are innovative.  

        While producers are innovating to create the next batch, consumers are using cutting edge wine cellars and clever gadgets to store, cork, and even access their wine without popping open the bottle at all.  Wineries and innovative businesses that design and create new methods of production and technology may be eligible for federal and state R&D tax credits to stimulate the efforts.


The Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation


        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 19, 2014 President Obama signed the bill extending the tax credit for the 2014 year.  Similar extensions are likely moving forward.


Developing the Wine Cave

        Modern technology is increasingly being used in the construction of state of the art wine caves.  Today, caves are built to provide a perfectly controlled environment for a consistent tasting wine despite what mother nature says.  Other technologies allow developers to achieve shorter construction times. 

        CC Wine Caves in Comptche, CA uses patent pending, preformed, interlocking concrete designs to bring down construction costs and time.  Another patent-pending technology by CC Wine Caves is the Cut and Cover method of building underground structures. Using Cut and Cover, projects can be completed quicker and more economically than the slow and expensive process of a drilled cave or conventional surface building. 

        Patented or patent pending technology is usually a very strong candidate for the R&D tax credit.
 

Land Development

        Developing land for wine cultivation often involves technical challenges requiring novel innovations.  California produces 89% of all domestic wine in the country.  However, the state also has the largest water shortage problem in the nation.   According to an economic analysis by the UC Davis Center for Watershed Sciences, “The 2014 drought is responsible for the greatest absolute reduction in water ever seen.”  The study notes that an estimated 430,000 acres of crop land will not be farmed this year due to the drought.   

        California farmers face challenges in competition for precious water resources every year. In Napa Valley, it takes about 100 to 200 gallons of water to irrigate one vine per season.  Most vintners realize that the future of viticulture will be sensitive to water shortages and innovative technologies will be necessary to maintain proper irrigation on the vineyard moving forward. 

        One innovative solution involves a recent development in the common drip irrigation method.   Deep-Root Irrigation (DRI) was developed by Napa Valley grape grower Jeff Ciudaj, who has been field testing the product with success for three years.  The Deep-Root Irrigation method provides a more efficient water delivery system to the vine and according to Jeff Ciudaj,

        “The DRI system puts control back into the hands of the grower, allowing them to solve many of the problems actually created by traditional surface watering methods.” 

        The product reduces water usage by about 50% by delivering water directly below the root zone where it matters the most, and then percolating the water back up through the rest of the roots.


Analytical Software

        Many technologies are available to help modern vintners achieve the exact wine they are aiming for and distribute it to their clients at the most optimal time.  Powerful analytical software is one example.  Analytics helps vintners identify the chemical compounds of the wine, tailor the right blend, manage inventory and distribute and keep compliance records.    

        Another example is the innovative software product, Blend Production by Orion Wine Software.  The Windows-based, bulk wine tracking and reporting system is designed to help vintners manage their entire wine production process.  With this software assistance, producers no longer have to search through years of history compiled by different people in different ways in order to compare one vintage to another. The Blend Production system retains the history of every vintage in an easily accessible database.

        HANNA Instruments in Rhode Island offers wine makers an assortment of wine testing equipment for wine analysis.  HANNA Instruments has several photometer models that determine the concentration of reducing sugars (RS) in wine samples.  The concentration of reducing sugars is one of the most important parameter that needs to be measured during the wine making process.  Tracking the increase of RS during the maturation of grapes is one of the critical components in deciding when to start the harvest, which in turn plays a significant part in determining the quality of the wine.  The company also offers a range of agricultural products that measure soil pH levels and fertilizer concentration.


Harvesting Technologies

Wine Harvesting        Automated grape picking machines are being utilized and re-designed within the wine industry.  Historically, they were seen as good alternatives to human labor for wine makers whose grapes did not require the dexterous human hand that is able to pluck grapes with very sensitive care.  That concept is now changing as innovative solutions are coming to market that allow grapes to be separated from the vine without causing damage to the fruit. 

        One solution involves a machine that uses a targeted puff of air to shake the grape from the vine and then inspects each grape with an assortment of small high definition cameras that have the ability to identify imperfections.


Gene Culturing

        Gene culture research within the wine industry aims to enhance the typical characteristics of grapes by identifying the more suitable parameters for each desired product and then altering the gene makeup of the grapes accordingly.   

        Metrics company, Enologix in California, has several patents for their innovative wine quality development processes.  One such invention involves the development of new yeast that is obtained by fusion between Sacoharomyces cerevisiae and Schizosaccharomyces pombe.  The end result is the creation of a new yeast that has the ability to degrade malic acid.  This is particularly applicable to the wine industry because excess malic acid can cause an imbalance between sugar and acid content, something that is not desired in quality wines. 

        Research efforts in gene culturing for the wine industry are not just limited to quality and taste but includes health benefits as well.  Scientists from the University of Illinois are working on develop a wine product that does not produce a hangover. The solution is thought to lie in the ability to reduce toxins in the drink that cause suffering the next day.  Another innovation involves producing wine with more resveratrol in it.  Resveratrol occurs naturally in red grapes and is thought by many to be the compound that promotes heart health and prevents blood clots leading to heart attacks and strokes.


Spoilage Prevention

        Microbial spoilage is a serious concern for most wine makers.  Spoilage can result in undesirable textures as well as odors or flavors in the finished wine.  Often times, vintners will spend considerably on consultants in order to find an appropriate solution to spoilage.  These methods however are not completely effective and can result in wine inconsistencies.  Several novel approaches have been recently developed to deal with this issue. 

        One potential solution involves using ultrasound technology to send ultrasound waves through a liquid and create small bubbles (cavitation). The cavitation process creates high temperature pressure zones which cause breakdowns in microbial cell walls.  This process makes bacteria more susceptible to hydroxyl radicals, which ultimately destroys them. 

        Another innovative approach involves the use of microwave technology in order to remove the spoilage organisms from the cracks and crevices of an oak barrel so that it can be reused.  Besides the initial cost savings from not having to purchase a new oak barrel, there are other quality benefits to recycling the barrel.  Using older barrels is sometimes a style choice since older barrels create a more delicately oaked wine that is well desired among many wine consumers.  Advocates believe this microwave technology could potentially solve the spoilage issue in oak barrels.  What’s more is that using microwave technology to remove spoilage organisms would reduced the water and energy consumption compared to the high-energy blasts of water needed for conventional filtration.


Preservation

Coravin Wine Access System        Innovative technologies are emerging that aim to preserve wine even after the bottle has been accessed.  The Coravin Wine Access System, for example, provides users with the ability to take wine from the bottle without popping the cork at all.  The system looks similar to a tire pump, it attaches to the neck of the bottle and uses a small, steel needle with holes on the side to penetrate the cork, allowing the user to pour out a stream of wine.  After the pour, a lever on the top opens a valve that releases argon gas into the bottle at high pressure, thereby filling the space vacated by the liquid. 

        Once the user has served a glass and removed the Coravin, the cork automatically reseals.   The system’s innovation is helped by the cork’s design.  Corks have the ability to expand back to 98% of its size even after it has been compressed down to 10%.   
 

Wine Blending

        Wine blending offers vintners the ability to adjust sweetness, improve color, and enhance aroma. The wine blending process usually begins with a specific goal in mind however, blending involves an experimentation processes in order to achieve the intended result.   

        Wine blending techniques involve meaningful changes in core ingredients for wine products, which requires laboratory activity.  Some wine manufacturers have contingents of chemists, scientists, and nutritionists constantly developing solutions to improve quality, achieve target alcohol level, improve shelf life, and increase nutritional value.   

        For example, researchers at UC Davis are integrating new technology with traditional techniques to create desired blends.  The research effort utilizes fermentation tanks equipped with Cypress Semiconductor Corp.’s technology. At the 12,000 square foot research facility, the 55 gallon tanks monitor sugar levels, control temperature, and transmit data wirelessly.  The technology helps to automate tasks that winemakers typically spend hours each day on.  Data collection via sensors and predictive analytics allows wine makers to reduce uncertainties.


Packaging & Bottling Innovation

        Efforts are also underway to make wine packaging less expensive, more varied, lighter weight, and more high-tech than ever.  Synthetic labels, environmentally friendly twist caps, containers with analytical capabilities, and mini barrel shaped containers are just a few of the innovations in this sector.  Wine producers cannot rely on quality to be the sole differentiator.

        585 Wine Partners has developed a unique packaging innovation that brings wine a step closer to catching up with the rest of the beverage market.  The patent-pending Mini Barrel design includes a plastic cylinder resembling a mini wine barrel designed with “feet” to prevent it from rolling. The cylindrical three liter bag-in-barrel was designed by 585 Wine Partners’ co-founder and director of packaging design, Katy Leese.  The Mini Barrel product also features a built-in opti-flow incline that helps the wine drain toward the spout without the consumer tipping the package. 

        Additional innovations in wine packaging have been gaining recent media attention. Shark Tank aired an episode in December 2014 showcasing an innovative wine-to-go product called ZIPZ, developed by Andrew McMurray, VP of Zachys Wine and Liquor Inc.  The product sealed the largest deal in Shark Tank history.  ZIPZ’s recyclable, single serving wine packaging aims to become for the wine industry what the aluminum can is for the soda industry.  The patent-protected product is about the size of a wine glass and shaped like one too.  The BPA-free plastic design is versatile for outdoors, indoors, and on the go.  The product is covered in patented clean wrap technology which helps deliver a fresh taste and clean glass with a long shelf life. 


Conclusion

        New technologies and unique approaches to wine harvesting, production, and packaging are emerging in every segment of the industry.  Federal and state R&D tax credits are available to support and stimulate these innovation efforts.


Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

Andrea Albanese is a Project Manager with R&D Tax Savers.


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