These five accounting leaders in the North Bay wine industry answer our questions about regulations, challenges and the future of their business.

Answers have been edited for space and clarity.

What has changed the most in your industry over the past two years?

Timothy Allen: We continue to see consolidation creating a challenge for our wine customers and wine distribution. It is becoming more and more difficult to attract the attention of the wine trade or the consumer. When the wine industry is challenged, the wine accounting industry is challenged.

Wine sales are down this year and last year, both in distribution and direct to consumer. Tourism in Napa/Sonoma has declined, which some attribute to San Francisco State being a travel hub in our region. Younger consumers are drinking less alcohol, replaced by cannabis or simply by choices they consider healthier. Now more than ever, it is critically important that every winery understands its cost accounting, sales margins and cash flow forecasts.

Guy Carl: Many wineries are struggling to maintain their sales volume in the post-pandemic market. On-site visit traffic at wineries has declined, so they need to find new and creative ways to connect with their DTC customers. The wholesale channel has been inconsistent, but opportunities exist.

In Napa Valley in particular, the last two years have been marked by a smoke-tinted perception of the 2020 vintage. Many brands have ignored this vintage altogether, creating cash flow problems. Subsequent vintages were praised as being of very excellent quality, which contributed to the recovery.

Jon P. Dal Poggetto: The last two years have seen the same cyclical decline in winery profitability that seems to occur approximately every 10 to 13 years in the wine industry. Conditions are currently expected to improve in 2025 and 2026.

Dave Dillwood: The global reduction in demand for table wine has had a significant impact on the sector, from state-owned wineries to smaller wineries. Inflation has had a significant impact on costs, while weak demand has made it difficult to manage the rising costs of doing business.

It has become very difficult for small wineries to find buyers if they wish to retire and do not have a successor. The most powerful players in the sector will be able to survive the current crisis, but it will be difficult for highly indebted wine companies to continue operations without significant capital investments.

James Elliott: DTC sales growth faces headwinds as customers have full cellars and appear more reluctant to purchase in the same quantities as they did during the pandemic.

Are there any new laws, regulations or tax rulings that make it more difficult this year?

Timothy Allen: There are a handful of tax laws specific to the wine industry that may benefit the winery taxpayer, including the $25 million cash basis cap, pass-through entity deduction, and AVA intangible asset amortization . Although we frequently see new tax laws, many of them do not have a major impact on vineyard taxation.

Guy Carl: By far the most difficult change to the income tax law was the requirement, from 2022, for wineries to capitalize all research and development costs, which had always been permitted in immediate deduction in the past.

Congress admitted that it never intended for this requirement to take effect, and it has promised for three years that it would rescind or delay this requirement. However, no deal was ever reached, so wineries found themselves saddled with unexpected tax obligations. As an example, a winery with annual revenues of $10 million could expect to pay an additional $1.5 million in income taxes during the first few years of this requirement. The current tax regime will expire at the end of 2025, so we expect it to end.

Dave Dillwood: There are concerns that upcoming rules requiring “subscription services” to make it easier to cancel their subscriptions could have a significant negative impact on Wine Club memberships and resulting sales.

The rules, while not directly aimed at Wine Clubs in particular, could lead to more cancellations. Wine Club sales have remained a strong point of the sales function, particularly for small and mid-sized wineries. There will also be costs associated with changing websites and communications to comply with the new rules, unless changes are made before the new rules take effect.

James Elliott: Customers are very interested in taking advantage of the provisions of the Inflation Reduction Act for renewable energy. On the other hand, the upcoming expiration of the Tax Cuts and Jobs Act of 2017 places many of our clients in a holding pattern when it comes to long-term investments.

Where do you think the industry is working hardest to reduce costs? What trade-offs are involved?

Timothy Allen: With wine industry sales declining, it is more important than ever for a winery to be careful with its expenses. AWG relies on foreign labor for some of the most basic accounting transactions, which presents a considerable cost/benefit ratio. Additionally, AWG and other accounting firms are always looking for ways to improve technology and automate services to reduce efficiency and costs.

Guy Carl: There is currently a lot of pressure on packaging materials, both from a cost and environmental impact perspective. Many are moving towards cheaper materials that weigh less in shipping. It remains to be seen how consumers will feel about this change, whether it will affect their perception of the quality of the wine and whether this feeling could be mitigated by the improvement in the carbon score.

Jon P. Dal Poggetto: Although cost control is important, the industry primarily strives to achieve better margins by increasing prices to compensate for increases in production costs that are not controllable in the short term. This leads to lower sales in 2023 and 2024 compared to previous years.

James Elliott: Customers are looking to match their inventory to current market demand and assess the ROI of most spending categories. The problem is that if they reduce their inventory too much for the current 2024 harvest, they could end up not having enough product if the market rebounds faster than expected.