Agriculture technology, also known as agtech, is rapidly growing and could disrupt and innovate agribusiness. Agtech companies developing novel technologies could overlook strategic tax credits and incentives.
Specifically, the R&D tax credit can help agtech companies grow.
How Agtech is Changing Agriculture
From the first agricultural revolution nearly 12,000 years ago to the green revolution of the 1950s and 1960s, transformative periods in agriculture have been marked by technological advancements in:
- High-yielding crop breeds
However, the agriculture industry is sometimes seen as less advanced in terms of innovation and digitization.
A new agricultural revolution is underway, promising solutions to challenges around food insecurity, environmental conditions, resource constraints, and more.
This new era is marked by investments in agtech. Fortune 100 and start-up companies alike are taking action to blend the expertise of conventional agriscience methods with advancements in fields such as software and biological engineering.
Much like the manufacturing sector’s Industry 4.0, the agtech revolution is heavily based in advanced technologies such as, but not limited to:
- Artificial intelligence
- Data analysis
The Agriculture Challenge
The agriculture industry needs to sustainably increase agricultural production to feed a growing world population while still maintaining an economically viable business. Three themes emerge from the current challenge:
- Protecting the environment
The United Nations projected the global population could grow to around 8.5 billion in 2030. This means food production needs to increase and food waste needs to decrease.
The UN previously set a sustainable development goal (SDG) to end hunger, food insecurity, and malnutrition by 2030.
However, in its latest report, the Food and Agriculture Organization (FAO) of the UN said the world is moving away from its SDG, and that nearly 670 million people—8% of the population—will still be undernourished in 2030, the same population percentage as when the SDG was set in 2015.
Agribusiness is a business poised to drive economic development globally. Record costs in areas such as fertilizer and energy, coupled with less-than-optimal selling prices, are just the start to profitability concerns within agribusiness.
Labor costs—when labor can be sourced at all—are increasing. New laws, regulations, and a push toward sustainable farming are also increasing farmers’ cost of business.
Protecting the Environment
Agriculture companies are under immense pressure to evaluate and change practices to address significant issues related to:
- Greenhouse gas emissions
- Biodiversity loss
- Water scarcity
- Soil degradation
Agtech solutions span the spectrum of the agriculture industry—from land evaluation and seeds to harvesting and processing—and will help address the challenges agribusiness companies face. Below are some of the key areas impacting the industry and its challenges.
Robotics is a leading technology within agriculture, an industry facing labor shortages, cost increases, and repetitive tasks. Companies are developing advanced robotics, combining practices in mechanical engineering and machine learning.
Controlled Environment Agriculture
Controlled environment agriculture (CEA) includes advanced systems such as indoor vertical farms and automated greenhouses with growing conditions free of pests or disease.
Elements are often fully automated, closed loop systems with controlled variables and allow for continuous growth throughout the year. These developments require multidisciplinary teams of:
- Plant scientists
- Electrical and software engineers
- Mechanical and material engineers
Crop Monitoring and Precision Farming
Internet of things (IoT) technologies collect and provide farmers with granular data to make precise, actionable decisions. These solutions can include field sensors or aerial imaging for data on farm conditions.
This includes livestock monitoring and animal welfare advancements including wearable sensors that measure livestock health and activity, among other technologies.
The agriculture industry has a long history of biological development. While the goal of developing high-yielding crops is consistent, additional focus has been on how biotechnology can create more sustainable agriculture. This includes sustainable, effective fertilizers and resilient seeds and crops.
Both agribusiness and agtech companies continue to develop and provide innovative and disruptive solutions to address the challenges. It’s important they take advantage of available tax credits to help company viability and continued work towards solutions for the production, profitability, and environmental challenges.
How Agtech Companies Can Use R&D Tax Credits
The federal R&D tax credit is a dollar-for-dollar tax savings that directly reduces a company’s regular tax liability. In general, companies can generate a credit of approximately 10% of their qualified expenses, depending on several factors. If the R&D credit can’t be used immediately or completely, any unused credit can be carried back one year or carried forward for up to 20 years. Additionally, over 30 states offer R&D tax credit incentives to further increase a company’s savings.
For certain start-up companies, up to $250,000 in federal R&D tax credits generated in tax years beginning before 2023 may be available to offset payroll tax. The Inflation Reduction Act increased the amount to $500,000 for tax years beginning in 2023.
Start-up companies that are eligible to elect the payroll tax offset include those that both:
- Never had gross receipts or only had them within the last five years
- Have less than $5 million in gross receipts during the credit year
Qualifications for R&D Tax Credits
Qualified R&D ultimately depends on whether the activity meets each element of the four-part test established in the tax code.
The activity relates to a new or improved function, performance, reliability, or quality of a business component—a product, process, software, technique, formula, or invention—either held for sale or used by the taxpayer in its business.
Elimination of Uncertainty
The activity is undertaken to discover information intended to eliminate uncertainty about the capability, method, or design of a new or improved business component.
Process of Experimentation
The activity involves a process designed to evaluate one or more alternatives intended to eliminate the uncertainty through, for example, modeling, simulation, or a systematic trial and error methodology.
Technological in Nature
The process of experimentation must rely on hard sciences, such as engineering, physics, chemistry, biology, or computer science.
Qualifying Expenses for R&D Tax Credits
If a company determines its activity likely qualifies, the next step is to identify related expenses, which fall into four categories.
Qualifying employee wages can include taxable wages from individuals performing qualified research, as well as those who directly support or supervise the research. If an employee is 80% qualified, 100% of their wage can be included to calculate the credit.
These are expenses for materials used or consumed in the performance of R&D.
These include cloud computing expenses for shared computer rental or cloud platforms used for research and development.
These are expenses for engaging third-party companies that perform qualified R&D on your behalf, such as consultants, contractors, or other outside testing and development services.
What’s the Next Step to Claim the R&D Credit?
If you think your company qualifies for the R&D credit, the first step is to collect preliminary information about your company’s potential qualified activities.
That information can be used to develop an estimate of the credit benefit your company could receive as well as to 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.
R&D tax credits can provide cash savings for a company focusing on development efforts. However, with increased scrutiny around R&D credits at the federal and state levels, it’s crucial to understand what’s necessary to substantiate a credit claim, as mistakes can be costly.
Each company’s goals and resources are unique, which makes it important to develop a customized project plan to identify, calculate, and support a company’s R&D tax credits.
We’re Here to Help
To learn more about how the R&D tax credit could affect agribusiness as a whole and how it’s affecting specific branches of agriculture, like wineries and the hemp industry, contact your Moss Adams professional.
You can also explore our tax planning page for additional resources related to filing for the R&D tax credit and learn more about how technology companies are utilizing the R&D tax credit.