Common Challenges & Opportunities when Claiming the R&D Tax Credit in Agriculture

The Research and Development (R&D) Tax Credit provides valuable incentives for innovation across industries, including agriculture. However, not all farms are eligible for this tax credit. Various factors can determine whether a farm meets the eligibility criteria, and the nature of farming operations can make it challenging to meet these requirements.

Here are some of the challenges that agricultural businesses may face when trying to claim the R&D Tax Credit:

1. Eligibility Criteria: One of the primary challenges is meeting the eligibility requirements set forth by the IRS and state tax authorities. The R&D Tax Credit requires that activities meet specific criteria including being technological in nature, intended to develop a new or improved product or process, and include a process of experimentation to resolve technical uncertainties. While certain agricultural functions may meet these criteria, activities such as routine farming practices do not qualify.
2. Documentation Requirements: Claiming the R&D Tax Credit requires thorough documentation that shows a nexus between the qualified activities and the qualified expenses. Agricultural businesses must maintain records that detail the nature of the research activities and the corresponding qualified expenses. Lack of documentation can lead to issues in defending a R&D Tax Credit claim in the event of an audit.
3. Complexity of Agricultural Research: Agricultural R&D can be inherently complex, depending on the size of the agribusiness. It can involve a combination of scientific and engineering disciplines, environmental variables, and regulatory factors. Determining which activities qualify and determining eligible expenses based on the type of development effort can require expertise in both tax law and agriculture. For example, while a farm may have substantial supply costs related to improving crop yield, in most cases, these supply costs are “incidental” to the R&D activities and are therefore not qualified.
4. Evolving Regulations: The R&D Tax Credit is an ever-evolving landscape due to changes in legislation, new case law, and differences in interpretation at the federal level versus applicable states. Enlisting professionals who are up to date on these changes can mitigate risk associated with uncertainty in regulations.

The R&D Tax Credit is a valuable tax planning tool for agribusinesses engaged in research and development. However, claiming the credit may pose several challenges, such as meeting eligibility criteria and documentation requirements, identifying qualified expenses, and complying with regulations. Navigating these challenges requires careful attention and expertise. With proper guidance, agribusinesses can minimize risk and maximize their benefits from the R&D Tax Credit.

If you have any questions about the R&D Tax Credit, how your agribusiness may qualify, or McGuire Sponsel’s approach to R&D Tax Credit claims, please do not hesitate to reach out.