By MICHELE F. MIHALJEVICH

Indiana Correspondent

WASHINGTON, D.C. — A change in tax law has increased the net value of a tax credit designed to promote research in agriculture and other industries.

The research and development (R&D) tax credit has been around since 1981, when it was introduced as a part of the Economic Recovery Act. Under the Tax Cuts and Jobs Act (TCJA) of 2017, procedural changes were made that resulted in the net value of the R&D tax credit for an original filing increasing about 20 percent for tax year 2018 and going forward, said Shaun Yeh, national tax practice director for Tax Point Advisors.

Agricultural activities eligible for the credit include development and/or implementation of new strains of crops, plants or livestock, irrigation systems, feeds or feed techniques, gene transfer techniques and disease-resistant crops or livestock, according to Houston, Texas-based alliantgroup.

To qualify for the credit, agricultural activities must meet a four-part test found in Section 41 of the Internal Revenue Code, Yeh noted. Qualified research activities must involve a new or improved business component and the activities must be technological in nature. The component may be a product, process, formula or technique.

The work must also include the elimination of uncertainty and the process of experimentation. The uncertainty that is overcome can be methodology uncertainty, where technical challenges are overcome by analysis, systematic trial and error or the evaluation of alternatives.

Tax Point Advisors provides R&D tax credit study services to business owners and public accountant firms.

“We essentially work through a three-step process to decide if a potential client can take the credit,” Yeh explained. “Do they have qualifying research activities? Do they have significant qualifying research expenditures associated with those activities?

“We then run those expenditures through specified calculations to translate into a credit. These credits are a dollar-for-dollar benefit against tax liability and can be carried back a year, and carried forward for 20 years if necessary.”

The name of the R&D credit may cause some farmers to think they wouldn’t be eligible, Yeh pointed out. “The biggest reason farmers shy away is the name of the credit itself. People hear R&D and think this must be a credit for laboratory-based work.

“A lot of ranchers and farmers are doing work that’s considered experimentation, but not lab-based. Congress meant for the credit to be broadly applied. Congress broadened the definition of research for this credit to expand who can qualify for it, and they’ve created a number of new rules to enable the utilization of this credit for more businesses.”

To give farmers an idea of the types of research that might qualify for the R&D tax credit, Yeh provided a list of qualifying research activities that might take place on a dairy operation. Included are experimenting with feeds and supplements, holding pens and bedding, feed schedules or modalities and milking equipment and techniques.

Also on the list are developing specialty products such as reduced-fat or protein-enriched milk and improving breeding practices to affect milk quality and production.

More than $7.5 billion in federal R&D tax credit benefits are given out annually, according to alliantgroup. The R&D tax credit provides “a hidden and immediate source of cash for many small and mid-size companies,” it stated.

“(It) creates a significant reduction to current and future years’ federal and state tax liabilities. Every successful company is potentially eligible for an R&D tax credit of some amount. A business can take the credit for all open tax years, generally the last three or four years plus the current year,” according to alliantgroup.