Agricultural R&D Tax Credits: Which Activities Qualify?

If you handle finances and expenses for a commercial farm, you know how technology influences food production, from handling crops or livestock to shipping the product to market, especially with ever-evolving food sciences. As a financial professional of a large farm, you can also appreciate that there are business tax benefits available and you can understand the basics of some of those benefits.

What you may not know is how much the federal Research and Development (R&D) Tax Credit may be available to help lower your income tax bill.

What is the R&D Tax Credit?

The now-permanent R&D credit, enacted in 1981, allows taxpayers who use the hard sciences or technology to create or improve products or processes to save up to 13% of eligible spending on their taxes. Often large companies in the manufacturing, software, high-tech, and pharmaceutical industries claim the credit. Beginning last year, if you meet certain criteria the credit can also be used to offset Alternative Minimum Tax for certain small businesses and start-up businesses can utilize the credit against a portion of their quarterly payroll taxes.

Activities that qualify for the credit must meet the following four criteria: involve new or improved (aka “permitted”) products, processes, or software; be technological in nature; work toward elimination of uncertainty; and involve the process of experimentation.

Qualifying Agricultural R&D Tax Credit Activities

The agricultural industry frequently incurs costs for innovations that can qualify for the R&D credit. Technological advancements like robotics to increase yield or improve production efficiency, or technology to evaluate and test soil, are just a few activities performed by farms and other agricultural businesses that could qualify them for the R&D credit.

Qualifying agricultural activities can include developing new or improved:

• Technologies and/or processes to improve the harvest lifecycle, from planting to harvest
• Breeding and/or feeding techniques for livestock
• Waste reduction or reuse
• Packaging processes for better managing moisture or temperature
• Methods or technologies to minimize/eliminate crop damage from disease
• Technologies to improve the ultimate yield and freshness of product from harvest through transport
• Product development through cross-breeding
• Irrigation systems, or soil improvement, plant nutrients or fertilizers

While the above might bring to mind crop production, dairy farming, livestock raising, poultry, and egg production, there are other activities that qualify. These include urban agriculture, grocery delivery, nutritional science and industrial trans-fat elimination, as well as wine and craft beer production, coffee and chocolate production, gluten-free production, meat science and fish farming.

Agriculture may present many opportunities fo R&D tax credits now and in the future. Contact us to explore this area further and to help your farming operation apply for the R&D tax credit.

For more insight, observations and guidance on the R&D Tax Credit, visit our Freed Maxick Guide to the Federal Research and Development Tax Credit webpage.