R&D Tax Credit Now Supports Research in Tractors, Barns, and Fields
American farmers are feeding the country, but commodity prices are currently lower than recent years. Some farmers are burning equity, some are breaking even, and some are winning. In times like these, activities such as hedging, coop dividends, crop insurance, and government payments can make a real difference. Another way to improve cash flow is to utilize tax credits — specifically, the research and development (R&D) credit.
R&D credit now available to agribusinesses
The R&D credit has been in the tax code since the 1980s, and was designed to support jobs in the United States and encourage domestic businesses to improve their products and manufacturing process. Many industries have taken advantage of tax incentives for the costs incurred in operations for innovation in science and technology. However, a majority of operations in the agriculture industry — including grain, dairy, and swine — couldn’t take advantage of the credit due to the law’s restrictions.
With the Protecting America from Tax Hikes Act (PATH) in 2016, the R&D credit was made permanent, giving companies increased confidence to invest time and resources to calculate the credit with the knowledge that it will apply in future years.
Eligible grain activities
Qualified research activities are those incurred to develop (or attempt to develop) new products, or improve (or attempt to improve) existing products, attempt to develop a new process, or attempt to improve an existing process. These activities should support discovering information technological in nature or applications intending to develop new or improved business products or processes. All research activities should have a process of experimentation relating to a new or improved function, performance, reliability, efficiency, or quality.
Activities should be new to your farm, not new to the world, and are something you need to test before you use on a larger scale. Specific eligible activities include:
- Experimenting with disease control methods through new fungicides and seed treatments
- Testing precision plant equipment with a goal of efficiency, with inputs and increased yield
- Experimenting with new or different kinds of fertilizer (organic)
- Experimenting with cover crop and effects on N uptake and soil erosion
- Attempting to develop or implement new cultivation techniques
- Experimenting with irrigation and drainage and their effects on soil health and reduction of N loss
- Experimentation with crop rotations and continuous corn, and their effects on yield
- Developing new weed or pest management techniques
- Hybrid selection and genetic development of new crops
- Researching and developing new methods to maximize harvest yields
- Testing planting dates, population, row spacing, and twin rows, and their effect on growth and development of plants
- Experimental development of new farm machinery or ancillary components
- Testing harvest equipment to reduce dropped grain or improve harvest time
- Customized formulation development (agronomists who spend time performing customized blending services for producers in order to find optimal formulation)
- Software development (personnel or contractors that spend time developing new, customized software for application or planting)
- Soil sampling as part of an experimentation process
- Grain or fertilizer bin design and expansion (engineers, contractors, and others who spend time scoping and designing new or upgraded terminals)
Qualifying costs might include wages to perform, supervise, and support R&D; supplies consumed in the research process, prototypes, scrap; and contractor costs for consultants and engineers. We believe a good rule of thumb to determine if you will benefit from the credit is if you have more than $50,000 in qualified expenses.
R&D credit can improve cash flow
The R&D credit is a general business credit under IRS Code 41. In the case of a small business under $50 million in average annual gross receipts, this credit now offsets both regular tax and Alternative Minimum Tax, and can be applied up to $250,000 (subject to some limitations) against the employer portion of Social Security taxes.
For example, if an agricultural producer does not have an income tax liability, but has employees and a Federal Insurance Contributions Act (FICA) liability, the credit can be applied against this payroll tax by making an election. The payroll tax benefit provides a cash flow boost in the following year, when the payroll tax credit is claimed.
Calculating the positive impact of the credit
A taxpayer paying income taxes can get an immediate cash flow boost. The income tax credit (rather than the payroll tax credit) reduces tax liability in addition to deducting the R&D expense. The credit may be considered in determining the required payment of estimated income taxes. In the first three years of conducting qualified research, the tax credit is 6 percent of eligible expenses. Thereafter, using the alternative simplified version of the credit, the business claims a credit of 14 percent of the excess of current R&D expenses over 50 percent of the average R&D of the prior three years times 65 percent factoring in a Section 280C reduced credit.
We find most producers select the simplified calculation.
Qualified research expenditures for the previous three years –
|Total||$375,000/3 = Three-year average of $125,000|
$125,000 x 50% = $62,500 or 50% of the average R&D of the prior three years
2017 qualified research expenditures of $150,000 less 50% of the average R&D of the prior three years of $62,500 = $87,500
$87,500 X 14% = $12,250
$12,250 X 65% Section 280C reduced credit
$7,962.50 credit, a potential improvement to your cash flow
How we can help
If your agricultural operation is performing any eligible activities, it’s time to start putting money back in your pocket. The IRS is providing a three-year lookback window to amend returns and take advantage of this credit; the longer you wait, the less cash you’ll get back. Depending on the state you operate in, there may also be additional state R&D credits available.
Agriculture in the United States is continuously innovating, and we encourage agribusinesses to practice and experiment with developing new ways to stay ahead of the curve and succeed in the industry. Our agribusiness professionals are well-versed in the research requirements for the R&D tax credit and can help navigate the IRS’s guidelines. We can also help you determine if you have enough R&D expenses to make the credit worth your while.