Agriculture R&D Tax Credit Benefits for Businesses

Agriculture, Farming, Fishing, and the R&D Tax Credit

Small businesses in the Agriculture, Farming, and Fishing sectors can significantly benefit from the Research and Development tax credit by claiming incentives for developing new techniques, improving crop yields, or creating sustainable practices. The credit rewards innovation, even in traditional sectors, and can reduce the overall tax burden. For startups with little or no income tax liability, offsetting the R&D tax credit against payroll taxes is particularly advantageous, allowing them to apply the credit against up to $500,000 in payroll taxes annually. This helps improve cash flow and reinvest in growth, labor, and further innovation.

What we do?

Are You Elegible?

Pass an audit?

Founded in 1984 by J.W. Norris as Reed & Co., Swanson Reed has grown to become one of the world’s largest firms specializing in Research and Development (R&S) tax credit consulting. We boast numerous publications. Our AI software, TaxTrex, is a cutting-edge AI language model capable of preparing R&D tax credit claims in just 90 minutes. Our audit insurance policy for R&D credits, creditARMOR, is one of the most cost-effective audit management products on the market.

If you have questions or require further assistance, please call or email our CEO, Damian Smyth, at (000) 000-0000. Feel free to book a short conference call with one of our national R&D tax credit specialists at a time convenient for you.

Schedule a Teleconference

Case Study: Agriculture

Business Scenario

Nut & Co. was founded in 1988 to design and build equipment to meet the needs of pecan growers and shellers.

The owner of Nut & Co. began his career in the pecan industry in 1972. From day one, the commitment to help strengthen the industry has always been at the forefront for the company. Designing and manufacturing reliable, high-quality equipment has helped build a company that continues to lead the industry year after year.

Nut & Co. incurred qualified research expenses related to the design and development of various cultivation, support, processing, and separation equipment during the 2013-2016 fiscal years. Its largest R&D project was the development of the Aspirator System.

The Aspirator System was designed in 2012 to accommodate both small and large shellers. At the time, the industry used blowers to separate the shell from the pecan meat. This process was inefficient and produced a lot of dust inside the plant. The aspirator system was designed to use suction methods instead of blowing. This kept the plant clean and accomplished the significant task of removing the shell from the pecan meat.

To qualify for the Research and Development Tax Credit, Nut & Co. had to determine the eligibility of its proposed R&D activities. Qualified research must meet four main criteria, known as the Four-Part Test. Nut & Co.’s qualified R&D activities included the following.

Deadline Calculator

Research Grants

Choose your Industry

Eligible R&D Activities

Design and development of a series of prototypes to achieve technical objectives (aspirator system design).

Nut & Co.’s hypothesis for this activity stated that it was possible to develop revolutionary shelling equipment capable of removing meat from the pecan shell using a suction method instead of the normal blowing method.

The experiments that Nut & Co. conducted in the design phase included predominantly conceptual technical drawings, mathematical calculations, and testing of different materials. These experiments could only be proven effective or ineffective in the prototype development and testing phase. Following experiments in that phase, during which the product was built and tested in various applications, the design was modified and retested until the desired result was achieved.

Testing and data analysis to obtain reproducible results to a satisfactory standard (development and testing of the aspirator system).

The main objective of this activity stated that, with a better knowledge of the intrinsic factors related to extracting pecans from their shells, it was possible to identify mechanisms to improve the current shelling process.

The details of this experiment included testing different materials, ultimately concluding that the system needed to use stainless steel, discharge tanks, and galvanized piping to ensure efficiency, precision, and safety.

Basic research to assess current knowledge gaps and determine feasibility (basic research for aspirator system development).

Prior to 2013, existing shelling equipment on the market was bulky and expensive. Therefore, in addition to the lack of comparable solutions available, the results of these research activities could not be known or determined in advance due to a series of specific technical challenges.

Nut & Co.’s eligible R&D activities during this experimentation phase included:

Literature search and review, including maintaining up-to-date knowledge on relevant certifications and standards.
Consultation with industry professionals and potential customers to determine interest levels and commercial feasibility of the product.
Preliminary review of equipment and resources regarding capacity, performance, and suitability for the project.
Consultation with key suppliers of components/parts/assemblies to determine the factors they considered important in the design and to understand how the design should be structured accordingly.

The basic research conducted by Nut & Co. was directly related to the main objective of designing the aspirator system, thus qualifying as R&D.

Continuous analysis of customer or user feedback to improve prototype design (Feedback-based R&D for the aspirator system).

Nut & Co.’s eligible R&D activities for this phase of its project included:

Continuous analysis and testing to improve product efficiency and safety.
Continuous development and modification to interpret experimental results and draw conclusions that served as starting points for developing new hypotheses.
Commercial analysis and functionality review.

These activities were necessary to evaluate the performance capabilities of the new design in the field and to ameliorate any design flaws, thus qualifying as R&D.

Live Webinar: The R&D Tax Credit in Agriculture, Farming, and Fishing

Duration: 60 Minutes

Learning objectives include:

An overview of R&D Tax Credits
Identifying Qualifying Research Activities
Defining the 4-Part Test
How to substantiate activities through documentation
Identifying Qualifying Research Expenses

Cost: FREE

CE/CPE Credits: One hour value

Knowledge Level: Basic*

Field of Study: Taxation

R&D Tax Credit Training for the Agricultural Sector

LBI taxpayer directive

Upcoming Webinar

Definition of Qualified Research

Qualified research consists of research with the intent to develop new or improved business components. A business component is defined as any product, process, technique, invention, formula, or software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.

The Four-Part Test

Activities eligible for the R&D Credit are described in the “Four-Part Test,” which must be met for the activity to qualify as R&D.

Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.
Elimination of Uncertainty: The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the business component, or the appropriate design of the business component.
Process of Experimentation: The taxpayer must undertake a systematic process designed to evaluate one or more alternatives to achieve a result, where the capability or method of achieving that result, or the appropriate design of that result, is uncertain at the beginning of the taxpayer’s research activities.
Technological in Nature: The process of experimentation used to discover information must fundamentally rely on principles of hard sciences such as physical or biological sciences, chemistry, engineering, or computer science.

What specific records and documentation did Nut & Co. keep?

As with any tax credit or deduction, Nut & Co. had to keep business records outlining what it did in its R&D activities, including experimental activities and documents to prove that the work took place systematically. Nut & Co. kept the following documentation:

Project logs / lab notes
Innovation register
Conceptual sketches
Design drawings
Basic research
Change logs
Test protocols
Results of test/trial analysis recordings
Resource allocation/usage records
Staff timesheets
Invoices
Receipts

By having these records on file, Nut & Co. confirmed it was “compliance ready,” meaning if it were audited by the IRS, it could present documentation to show the progression of its R&D work, ultimately proving its eligibility for R&D.

R&D Tax Credit Summary

Nut & Co. shows continuous improvements through research and development in the following areas:

Improvements in production times and efficiency
Improvements in product reliability
Decrease in labor and production costs
Production innovation resulting from:
Internal ideas
Existing customers having business needs requiring new solutions

Nut & Co. eliminated uncertainty by:

Testing on all supported versions to determine reliability and ease of use
Experimenting with possible fixes until a suitable solution was determined

Therefore, Nut & Co. meets the four-part test and qualifies for both the federal and state research and development tax credit. By claiming both federal and state R&D tax credits, Nut & Co. was able to obtain a significant credit amount for the 2013-2016 tax years.