Agribusiness Benefits from R&D Tax Credits

More than ever, the agribusiness industry is investing in innovative efforts to meet evolving industry needs and fill market gaps. Much of this innovation qualifies for the Credit for Increasing Research Activities (R&D tax credit), a tax credit designed to incentivize companies to invest in developing new products, processes, techniques, formulations, etc.

The R&D tax credit is a non-refundable dollar-for-dollar reduction to a company’s federal income tax liability and is generally equal to between five to seven percent of qualified R&D costs for the year. Furthermore, many states also have similar R&D state-level income tax credits. The tax savings can be substantial to mitigate companies’ tax liabilities and improve cash flow. If a taxpayer cannot use the R&D credit in the year it is generated, there is a 20-year carryforward for the federal credit, and most states have carryforward provisions as well. This tax incentive is available to companies across many industries, including agribusiness, as long as the company’s research activities relate to development of a new or improved function, performance, reliability or quality of a “business component” (i.e., a product, process, computer software, technique, formula or invention).[1] Furthermore, there must be uncertainty concerning the development or improvement of the product or process, and the taxpayer must go through an iterative process of experimentation to resolve any uncertainty.[2] Finally, the research activities must fundamentally rely on the principles of the physical or biological sciences, engineering or computer science.[3] Some common examples of qualifying activities within the agribusiness industry are as follows:

Farming
  • Developing and testing new or improved crops or formulas to increase yield, improve performance in specific climates or improve performance against certain diseases
  • Designing, developing and testing new fertilizers and other growing agents to increase size, yield or outcome of crops
  • Designing innovative solutions and techniques to reduce water and other raw material consumption in the growing process
  • Design and testing of new or improved waste management solutions
  • Developing new, improved or automated harvesting solutions
  • Collaborative research efforts with universities or other programs
Processing
  • Designing new or improved manufacturing processes for food processing
  • Improving yield or reducing scrap in food processing
  • Incorporating new technology into existing processes
  • Development of new food safety or disease-resistant processes and formulas
  • Improving the shelf life of processed goods
  • Developing software to track inventory or improve other business processes
  • Reducing waste or material usage in packaging and labeling

If your business is performing any of these types of activities, DHG has a team dedicated solely to the R&D tax credit and industry professionals with deep experience in the agribusiness sector who can help you evaluate the impact to your tax situation. For more information, reach out to us at tax@dhg.com.

 

References:

[1] Internal Revenue Code (IRC) § 41(d)(3)(A).

[2] IRC § 41(d)(1)(C).

[3] Treasury Regulation § 1.41-4(a)(4).

CONTRIBUTORS

Will Stallings
Manager, DHG Research & Development

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