By Max Vignola, CCSP
• Investing in continuous new and improved products is not only good for business; it can help you qualify for valuable research tax credits.
• There are four main types of qualified research activities. Chances are you engage in at least one. Read on to learn what they are.
• The R&D credit typically ranges from 6 to 14 percent of a company’s eligible expenses for new and improved products and processes.
• There are many nuances to exactly what constitutes “qualified” research. Don’t try claiming R&D credits on your own. Enlist a qualified specialty firm to guide you.
Agriculture is one of mankind’s oldest forms of commerce dating back thousands of years. But modern agriculture is vastly different from what it was even two or three decades ago.
The quantity of agricultural production has increased substantially. Plus, the overall quality of the process is far more efficient than it used to be, thanks to innovation and technology which removes much of the manual labor component.
Investments in continuous improvement and in new and improved equipment and processes have clearly made agriculture more efficient and profitable. But many ag professionals and their advisors often overlook the fact that the investments they’ve made in innovation can often qualify for valuable R&D tax credits at the federal and at some state levels.
What is the R&D Tax Credit?
Officially known as the “Credit for Increasing Activities,” the R&D Tax Credit as it’s more commonly known, is a federal tax credit available for U.S. companies that are engaged in qualified research activities. The definition of “qualified research” still leaves plenty to the imagination, and there is often confusion about exactly what constitutes “qualified” research activities. That’s why you don’t want to try claiming R&D credits on your own. Make sure you have a qualified specialty firm to guide you.
According to Internal Revenue Code 41, qualified research is research that is undertaken for the purpose of discovering information that is technological in nature and the application of which is intended to be useful in the development of a “new or improved business component” for the organization that conducts it.
In other words, qualified research activities are activities that relate to the development of new or improved:
• Formulas, or
Now you can see why so many different businesses potentially qualify for the R&D Tax Credit—keyword “potentially.”
The R&D Tax Credit was enacted in 1981 and has changed several times over the years. The credit, which became permanent in 2015, enables taxpayers to offset AMT as well as federal payroll tax for some qualifying businesses. The credit typically ranges from 6 percent to 14 percent of a company’s eligible expenses for new and improved products and processes. Eligible costs include the following:
1. U.S. employee wages.
Can include wages of chemists, biologists, engineers, machinists and agricultural subject matter experts, plus management, support staff and others.
2. Cost of supplies consumed in the development process and pre-production testing.
3. Costs associated with third-party contractors.
Includes U.S.-based contracted services qualifying development or research activity.
Companies that currently, or have in the past, invested in the creation of a new or improved business component, and which have expenditures similar to the ones described above, could potentially qualify for this Federal tax incentive.
Qualifying Agricultural R&D Activities
The ag industry has witnessed the introduction of robotic cleaning and feed dispensers in livestock barns, autonomous farming and harvesting equipment, as well as the creation of hybrid seed, fertilizer and crop protection techniques. Many of these innovations developed over time because of extensive research studies focused on finding efficiencies and new techniques for cultivating, producing, or harvesting. Thanks to the R&D tax credit, this research remains economically feasible.
Additional qualifying development activities:
• Feeding and breeding techniques.
• The use of drones to monitor and create imagery of fields and or livestock.
• Waste reduction techniques.
• Harvest lifecycle process improvements.
• Development of new irrigation systems.
• New or improved production or packing process.
• Development of partially or fully autonomous facilities.
• Creation of custom designed HVAC systems.
While these technologies have in many ways simplified and optimized the industry, they have also introduced new inherent challenges when it comes to harnessing and utilizing all currently available data. To meet these challenges, new data management tools have had to be created.
Agricultural Company Example
Company XYZ is in the dairy farming industry and has consistently invested in new or improved products and processes each year. Most recently the company invested in developing an internally-designed and internally-built production process with the goal of achieving greater efficiencies, greater output and a consistent higher quality product.
The project started with a team of 16, made up of six engineers, four machinists and two software developers, plus the director of operations and additional support staff. Additional engineering expertise was employed in later years. The project took a total of four years starting with the research and design phase and finishing with numerous rounds of final testing before going live for production. Because the aforementioned activities were qualifying research activities, the company was able to achieve the following results in the form of federal tax credits:
As mentioned earlier, the PATH Act of 2015 expanded and permanently extended the federal R&D Tax Credit. And the future of the R&D Tax Credit looks bright thanks to increased attention at both the federal and state levels.
Our goal at Bedford is to help business owners understand and take advantage of the tax incentives available to them. Hopefully, through increased awareness, there will be significant growth in the number of qualifying businesses, including many in the agriculture space, that successfully obtain this credit in future years.
To see if you qualify, contact your Bedford representative or email firstname.lastname@example.org.
Max Vignola, CCSP is the Director of Tax and R&D Services for Bedford Cost Segregation. Max is responsible for tax reviews and report certifications, ensuring that Bedford’s Cost Segregation studies are based on an appropriate interpretation of tax law and current IRS pronouncements. Additionally, Max is in charge of leading Bedford’s Research and Development Tax Credit division.
He can be reached at email@example.com | (603) 641-2600 x322