How to Claim the R&D Tax Credit for your Farm

Key Takeaways:
  • Many farmers qualify for the R&D tax credit but miss out due to lack of awareness and proper documentation.
  • Eligible farm activities include experimenting with new planting techniques, irrigation systems, fertilizers or livestock feeding methods.
  • Proper documentation is key to claiming the credit, and working with an advisor can help ensure compliance and maximize benefits.

 

Did you know that many farmers qualify for a significant tax credit without realizing it? The Research and Development (R&D) tax credit has been available to farmers for over a decade, yet it remains widely underutilized due to confusion and lack of awareness. If you’re experimenting with new techniques to improve crop yields, livestock management or soil quality, you may be eligible to reduce your tax bill.

What is the R&D Tax Credit?

The R&D tax credit is a federal incentive designed to encourage innovation by rewarding businesses—including farms—that invest in new or improved products, processes or techniques. The credit allows a reduction dollar-for-dollar on a farmer’s tax liability for specified expenses. However, keep in mind, the R&D credit is not a refundable credit and only applies to a tax liability. These specified expenses are labeled as Qualified Research Expenses (QREs). QREs are expenses that have already been spent through the year that are related to the research for a new product or process. Some examples include wages paid to employees and supplies that are conducted on behalf of the research project. The purchase or rental of equipment is not considered a QRE due to it being depreciable property.

The R&D credit is generally able to be carried forward up to 20 years and carried back 2-3 years at the federal level. If the claim is for a prior year, then an amended tax return must be submitted. Whether it is a prior year or filing in the current year, the form 6765 “Credit for Increasing Research Activities” must be completed and filed with the tax return. Instead of being able to deduct QRE immediately, the Tax Cuts and Jobs Act (TCJA) ordered for QREs to be amortized over five years.

To clarify, the R&D tax credit would be applied to the tax liability of the year incurred, however, the expenses associated with the research and development would not be deducted and instead expensed over five years through amortization.

While the discussion in this article is just on the R&D tax credit federally, please be aware that most states provide their own R&D credit as well. Many states in the Adams Brown footprint provide an incentive including Arkansas, Kansas, Missouri and Nebraska. Please be aware that Mississippi, Oklahoma and South Dakota do not. With the work and documentation that goes into filing for R&D, the opportunity to apply for the state credit should be taken advantage of.

Qualifications & Requirements

Qualification can be tricky since it must be development of a new product or improvements to an existing product that creates efficiencies for crops or livestock. The qualification also requires the process of experimentation. Here are examples of farm activities that may qualify:

  • Testing new or improved planting or harvesting techniques
  • Experimenting with new irrigation systems
  • Developing innovative fertilizers or soil blends
  • Testing new livestock feeding techniques
  • Implementing new methods to protect crops from pests or disease

The list continues to expand from here as long as it is new or improved to your farm. If the development increases profitability or efficiency for the farm, then it should likely qualify. It should be noted that just because it’s a new product to use does not mean it qualifies for R&D. It must go through experimentation and documentation of the entire process.

Another caveat related to R&D is the credit could have an adverse effect on FSA payment limitations. The credit could potentially throw an individual over the limit thereby reducing FSA payments. It could be more beneficial to not recognize R&D and stay within the limitations for FSA purposes.

The IRS requires detailed documentation linking QREs to specific research activities. This includes:

  • Written records of the research process
  • Payroll records for employees involved in research
  • Receipts for materials and supplies used in experimentation
  • Test results or prototypes that demonstrate an iterative process

Since thorough documentation is the deciding factor in an IRS audit, it’s recommended to work with an advisor to ensure compliance.

Questions?

The R&D tax credit can be a beneficial credit for farmers. However, those who are progressive with their farm might want to consider if they meet the qualifications. There could be several qualified research expenses being incurred without any knowledge that a credit might apply to them.

Adams Brown is not directly involved in the experimentation and documentation for R&D tax credits. However, Adams Brown provides resources and ideas for alternative streams of cash flow, like an R&D tax credit. Connect with farm accountant today if you have any additional questions on R&D tax credits.