As you’re growing your farming operation or looking at forging into new markets, a little-known tax incentive could be just what you need to help finance your expansion. The credit is designed to reward producers for trying new things that could not only stimulate their business but also spur wider economic development in the community.
Some projects that might qualify for the Research and Experimentation Tax Credit, or R&D tax credit, include:
- Developing all natural or organic crops or produce
- Developing new or automated systems along with operational processes
- Evaluating new irrigation methods
- Testing new seed varieties or cultivation methods
- Evaluating new breeds or species of livestock
For example, if testing new seed varieties, not only would the new material qualify but potentially the supporting costs to grow the trial plots would qualify as well. Fertilizers, crop protection products, fuel, labor and other direct and indirect costs can also qualify for the credit.
Determining if an activity qualifies and which costs can be included in the credit calculation can be complex. Seek the help of a tax adviser and an R&D tax credit expert to determine what costs are eligible and how you can capture these costs to help support the claim. When done properly, the tax savings can be significant.
To show how an R&D tax credit might apply, here is an example: The farmer produces row and tree crops. During the year the farmer conducted several trials of new materials, including seed varieties, crop protection inputs and fertilizers. It’s important to note these were new to him, not new to the world, but the farmer needed to test and evaluate the inputs on his farm before determining the effectiveness and viability of using them on a bigger scale.
The producer was also involved in a project to grow a crop that has not been grown in that particular region in the past. This was a joint venture with an agriculture group outside the country. If successful it would allow the company to diversify its crop offering, protecting it from peaks and valleys in crop prices. The company expended some effort in developing the crop nutrition and protection program as well as evaluating planting, irrigation and harvesting processes.
The farmer also worked on developing organic crop offerings, including evaluating new techniques to protect and fertilize the crop while remaining within the organic standards. The partnering company evaluated ways to limit the yield loss that would occur from using these alternative materials.
The farmer was able to include the wages of those who were involved in evaluating the inputs. He also included the wages of those directly supervising the trials and the field labor involved in the trial plots. The inputs tested were included as supply costs, as well as the other necessary costs to grow the crops in the trial plots such as crop protection products, fertilizer and water.
These costs added up to a little more than $550,000 and generated a federal R&D tax credit of more than $35,000. That is a direct dollar-for-dollar tax savings of $35,000.
The tax credit is determined by the amount of qualifying costs, which must be identified and supported. Generally, projects with R&D costs of $250,000 and above are good candidates to pursue the credit. Estimating your qualifying costs can be a difficult task if done alone. This task can be done accurately and efficiently by meeting with your tax adviser and an R&D tax credit expert.
For more information on the R&D tax credit, visit www.kcoe.com/changes-rd-tax-credit-benefit-small-business. FJ