Emergence of research and development credits in agriculture

By Brian Ravencraft

Whether it be grain or livestock farming, farmers are continually developing new processes and solutions to increase yields and drive success. However, many farmers/agricultural organizations aren’t aware that their operation may qualify them for research and development (R&D) incentive programs. Most farmers believe large industries like pharmaceuticals, manufacturers or technology are the only types of entities eligible for R&D credits.

Although available to other traditional industries for many years, R&D tax credits were expanded to farmers just within the past few years. Recognizing that the nation’s farmland was remaining stable as the American population grew rapidly, Congress, with bipartisan support, expanded the R&D tax credit to farmers to incentivize them to find innovative ways of producing more food on the same amount of land.

These federal and state tax credits apply not only to the farmers that find ways to innovate but also is expanded to all the companies that consult and collaborate with farmers. Companies that can qualify in the agriculture industry include entities such as; farm equipment developers, seed and plant companies, fertilizer manufacturers, livestock feed developers, and many others.

One challenge for farmers is simply being aware of the R&D tax credit and understanding which activities they are already engaging in that could qualify.

Thus, the burning question is: what qualifies as Research & Development?

The following are a few examples of agriculture activities and innovations eligible for R&D Tax credits:

• Hybridization or development of new strains of crops, plants, or livestock
• Implementation of precision farming techniques in attempt to increase yield and/or production efficiency
• Experimentation with new or different fertilizers (organic etc.)
• Development/implementation of new ways to protect crops from disease
• Development and implementation of new irrigation systems
• Improvements in harvesting techniques
• Implementation of new equipment to improve harvest cycle times
• Development or experimentation with new feeds or feeding techniques for livestock
• Development and experimentation with new breeding techniques.

So, as you can see, the list is fairly liberal. Most farmers live in innovation and are continuously trying new feed and genetic packages for livestock, or seed and chemical technics in row crop farming. The overall goal is to increase yields and profitability. As such, these are qualifying attributes for the R&D credit.

Another challenge farmers may face, when trying to claim the R&D credit, is the documentation requirement. Claiming the credit requires thorough documentation that shows an interconnection between qualified activities as listed earlier and qualified expenses. The business needs to detail the nature of the research activities and corresponding qualified expenses. Thus, navigating the eligibility and documentation requirements requires upmost attention and expertise.

Who has the expertise and performs the study? Many reputable companies exist in this niche area that can perform the necessary testing and support needed to claim the credits (and they stand behind the report should you ever be audited). Most do not charge for having a preliminary study done. Getting educated on eligibility and how you can benefit is essential before signing up and paying for the actual study.

Overall, farms that take advantage of the R&D Tax Credit at the federal and state levels can recoup a portion of their R&D expenditures, increase cash flow, and reinvest much needed capital into the business.

Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.agribusinessaccounting.com or www.HolbrookManter.com.