The Research and Development (R&D) Tax Credit has been around since 1981, and for many years it was a temporary measure that was renewed for a year or two at a time. In 2015 the tax code was enhanced and the credit became permanent. For many people, the term “R&D” conjures thoughts of lab coats and beakers. The good news is, you don’t need to wear a lab coat to qualify. It’s available to entities of all different sizes and in many different industries — including agriculture. The credit provides dollar-for-dollar reduction and creates an immediate deduction for tax purposes, providing additional cash flow.
But here’s the great news: Many of the day-to-day activities associated with agriculture can qualify. Please bear with me — the list is a little lengthy (but that’s a good thing!).
Examples of Potentially Qualifying Farming Activities
- Development of new strains or cross-breeding of products with improved nutritional value
- Test plots (planting different crops or variety of seed or evaluating alternative growing parameters)
- Development or improvement of new cultivating or harvesting techniques and/or soil development
- New or improved processes to increase yield
- Development or improvement of fertilizers, chemicals, irrigation systems, etc.
- Development of methods and techniques to protect crops from disease and/or pest control
- Development or improvement of custom equipment configured to operate in specific environmental conditions
- Development of custom-designed, specialized machinery
- Development and/or implementation of automated processes
- Development or experimentation with new cultivation techniques
- Development of monitoring capabilities for field conditions
- Improvement to facilities due to environment and/or safety
- Improvements made to the harvesting process, intended to result in less environmental contaminants
- Developments to meet certification criteria, such as organic and non-GMO
- Conduct testing of new concepts and technology
- Development of new technology for which you’ve applied for a patent (patent safe harbor)
- New or improved feeding or breeding techniques for livestock
Let’s look at the types of expenditures that qualify for the credit:
- Taxable wages paid to employees for services performed in conducting, immediate supervising or directly supporting qualified research
- Amounts paid for supplies used in qualifying research
- 65% of the amount paid to outside parties, conducting qualified research on before of the taxpayer.
After reading the above, you might have identified a few things on the list that you’re doing, or that you are planning. What kind of records do you need to keep in the event of an audit? Well, there are no specific requirements spelled out in the code or regulations. However, you need to retain records in sufficiently useable form and detail to substantiate that expenditures are eligible for the credit. Case law also supports the use of estimates when underlying documentation supports them.
Need More Information?
There are several resources on our website to help you learn more about the R&D credit. In case you missed it, we recently conducted a webinar, and you can download the recording along with a PDF of the slides here: Research and Development Tax Credit Opportunities for Ag.
In addition, please refer to this handy PDF: Research and Development Tax Credit: Boost Your Bottom Line and Secure Greater Savings for Your Agribusiness.
You Think You Might Qualify — What’s Next?
Contact us! Talk to your Wipfli relationship executive or reach out to someone on our R&D team. We have a team of tax professionals who are well-versed in R&D who would be happy to answer your questions. Wipfli offers a no-obligation, no-upfront-cost R&D feasibility study. In the feasibility study, the approximate value of the credit due is calculated, allowing you to consider your return on investment before pursuing further.