The agribusiness industry is no stranger to innovation as it works to meet increasing market demands. Substantial tax incentives, such as the R&D tax credit, are available to help support and sustain continued development in the industry.
But first, what is the R&D tax credit?
The R&D tax credit is available to a broad range of agribusiness companies developing new or improved products or processes, including software, that result in increased performance, functionality, efficiency, reliability, or quality.
It’s a dollar-for-dollar tax savings that directly reduces a company’s tax liability. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused R&D tax credit can be carried forward for up to 20 years. In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes.
New or small business may be eligible to apply the R&D tax credit against their payroll tax for up to five years starting in 2016. The R&D credit is available both at the federal and state level, with approximately 40 states offering an R&D credit to offset state tax liability.
To help break down this complex topic, here’s a list of common questions agribusiness companies have about the R&D credit.
How much can a company save with R&D tax credits?
Companies can receive a credit refund of up to 11% of their qualified expenses, depending on a number of factors. Generally, the more a company spends on qualified R&D, the higher the credit they’ll receive, with taxpayers receiving a larger credit if they increase R&D spending year over year.
What types of R&D activities qualify for the R&D credit?
There are two main types of activities that may qualify for the R&D credit:
- Developing new or improved products
- Developing new or improved processes
The most common qualified R&D activities for agribusiness are generally related to process improvements, although many companies may also invest significant resources in new product development.
With food safety, quality, and sustainability top concerns for the industry, many agribusiness companies are investing in development of equipment and systems for fertilization and irrigation in the fields as well as processing, packaging, and storing product inventory. The costs related to new or upgraded equipment—and the labor and materials dedicated to process or product development projects—could qualify for the R&D credit.
What activities within the agribusiness industry qualify for the R&D credit?
Development projects for growers are frequently different than those for processors. Here are some examples of R&D activities that have been claimed for both.
- Increasing efficiency of irrigation systems to reduce water consumption
- Optimizing fertilization schedules, application techniques, or formulas
- Introducing netting or natural predators to reduce crop losses
- Developing new or hybrid crops for increased yield, pest resistance, or weather and drought tolerance
- Developing sorting and washing equipment and methods for improved food safety and quality
- Developing new packaging materials and methods to increase shelf-life or optimize storage space
- Optimizing processes by introducing inventory tracking software
Many other activities related to process improvement could qualify for the credit, such as:
- Testing the performance of new equipment, including material and labor costs
- Designing specialized tooling and equipment for harvesting and manufacturing
- Field testing new strains or hybrids of crops, plants, or livestock
- Improving harvesting techniques to increase yield or production efficiency
- Developing or implementing automated processes
- Developing or implementing ways to protect crops from disease or insect pests
- Developing and implementing irrigation systems
- Evaluating and developing soil and rootstock improvement processes
- Developing or improving packaging processes
- Developing or improving preservative chemicals
- Testing new or improved products for consistency and shelf life
To apply for these credits, what’s the next step?
If you think your company may qualify for the R&D credit, the first step is to collect preliminary information about your company’s potential qualified activities. That information is used to develop an estimate of the credit benefit your company could receive as well as identify other R&D-related tax planning opportunities so you can make an informed decision about whether an R&D credit analysis is worthwhile for your company.
We’re Here to Help
Each company’s goals, values, and resources are unique, which makes it important to develop a customized project plan to identify, calculate, and support your company’s R&D credits and activities.
With increased IRS scrutiny around R&D credits, it’s also crucial to understand what’s necessary to substantiate a credit claim. To learn more about R&D tax credits, see Five Misconceptions about R&D tax Credits—and if You Qualify, or request a credit benefit estimate to see how much your company could save.