R & D Tax Credits for Farmers Promote Innovation and Food Security

r-and-d-tax-credits-kansas-cpa-firm

Costs Offset for Strategies that Improve Yield or Efficiency

By Bill Glazner, CPA

When it comes to research and development (R & D) tax credits, most people think of large industries like pharmaceuticals, aerospace or technology. But farm owners are increasingly benefiting from R & D tax credits as the government seeks new ways to strengthen the American food supply.

Available to other traditional industries for many years, R & D tax credits were expanded to farmers just within the past few years. Recognizing that the nation’s farmland was remaining stable as the American population grew rapidly – we’ve more than doubled in the past 100 years – Congress, with bipartisan support, expanded the R & D tax credit to farmers to incentivize them to find innovative ways of producing more food on the same amount of land.

Why the congressional concern? Food production is considered a national security issue. In a complex world with changing geopolitical pressures, a nation the size of the U.S. that becomes too dependent on foreign sources to feed its population could find itself politically beholden to a foreign power, or worse, unable to provide the food its people need. The U.S. government wants to make sure we are independent when it comes to the food supply.

To ensure food independence, American farmers must continue to improve their processes and farming techniques so they can produce enough food for a growing population in the future with the same resources they have today.

The R & D tax credit supports a wide array of farming innovations, incentivizing farmers with tax breaks to offset the costs of such activities as:

  • Developing or utilizing improved hybrid strains of crop, plants or livestock
  • Process improvement to increase yield
  • Utilizing new or improved technologies, techniques, processes to advance harvest life cycle
  • Developing or utilizing improved fertilizers, irrigation systems, soil development, etc.
  • Developing or utilizing new or improved feeds or feeding techniques
  • Utilizing new techniques to protect crops from disease
  • Utilizing new or improved breeding techniques for livestock

No-till Planting

In essence, the R & D tax credit supports a wide array of tactics that an individual farmer is willing to try to see if it will improve on what has been done in the past. A good example is no-till planting.  Although this may be a common practice for some in the industry, if it is a new experiment for you to see if it can improve yield while reducing costs it may qualify for the credit.

Putting in seed without tilling the previous crop’s surface stock strikes some farmers as messy and wrong. But there are advantages. If you are planting during a dry spell, leaving the ground untilled preserves the moisture that is already there. Moreover, skipping the tilling stage contains costs. On the other hand, seeds may take longer to germinate in untilled soil, so trying no-till planting can be a gamble.

A farmer with a dozen fields may decide to try no-till planting on two or three fields while planting in the traditional way on the rest. For those two or three fields, the farmer could get the R & D tax credit for costs such as seed, water, fertilizer and consulting.

To qualify for the R & D tax credit, the farming costs must be incurred with the goal of increasing yield or efficiency.

Weighing Costs and Benefits

Innovation comes at a cost, so farmers who are looking to improve yields and efficiency must look at the numbers.

Is it worth it to invest in a variable rate planter, which uses GPS to determine which sections of a field are more productive and guides more seed to those areas? The R & D tax credit does not cover the cost of equipment. But other tax incentives do, such as bonus depreciation, and the combination of tax breaks can accelerate the benefits a farmer may see from such innovation. Alternatively, the farmer can try renting a variable rate planter for one or two seasons to gauge the results. The R & D tax credit could apply to any input costs including the equipment rental cost.

Above all, the costs and tax benefits of any farm management strategy must make economic sense.

Changing Feed Rations

In the livestock sector, changing feed rations can yield significant R & D tax credits. Many feedlots are constantly adjusting feed rations to improve gains and health while controlling costs.  These practices many times evolve constantly as different cattle rotate through the pens.

Larger feedlots could realize hundreds of thousands of dollars in R & D tax credits if they indeed participate in the qualifying activities and bear the risk of these changes.

Awareness of R & D Tax Credit

One challenge for farmers is simply being aware of the R & D tax credit and understanding which activities they are already engaging in that could qualify. It is still a fairly new tax incentive for the agriculture industry.

But for farmers who are progressive business owners, and who are constantly working toward improvements in their processes and operations, this tax credit can be beneficial, as this will directly reduce your taxes using expenses already incurred as opposed to traditional tax planning approaches of using additional cash to pre-pay expenses or deferring revenue, both of which negatively impact your cash flow.

If you would like to have a conversation about how the R & D tax credit can factor into your crop farming or cattle operation, contact your Adams Brown advisor.