R&D Tax Credits for Farms
Summary
Research and development doesn’t always happen in a lab. In fact, farms and other agricultural operations are often experimenting throughout the year, with feed, genetics, health protocols, and production methods. The R&D tax credits aren’t for what feels innovative – they’re about what meets the IRS’s four-part test.
What the R&D Tax Credit Is, and Why Farms Often Overlook It
The federal research tax credit is claimed on form 6765 and isn’t just for software and lab coats. The credit extends to all research and development that meets a specific four-part test set forth by the IRS, which leads to the question: When does normal farm improvement become research and development activity that qualifies for the tax credit?
The Four-Part Test
To qualify for the R&D tax credit, a farming operation does not need to look like a laboratory. What matters is whether the business was working to develop or improve a product, process, or production method. For farmers and ag businesses, that can include feeding programs, breeding programs, disease-control methods, hatchery processes, crop-production techniques, and other practical improvements made to increase performance, efficiency, or yield.
The next question is whether the work was technological in nature. In agriculture, that often means the activity relied on biological science, engineering, computer science, or physical science. In other words, if your team was applying science and testing real-world solutions to solve production problems, you may be much closer to qualifying than you think.
The third part of the test looks at uncertainty. At the start of the project, did you know exactly what would work, or were you trying to solve a problem without a clear answer? If there was uncertainty around capability, method, or design, that is an important sign the activity may qualify.
Finally, the IRS wants to see a process of experimentation. That means more than just trying something once. Strong claims are supported by testing, comparing results, adjusting treatments, evaluating different approaches, and documenting what was learned along the way. If your operation was solving problems through trial, measurement, and improvement, you may already be doing qualifying R&D without realizing it.
Feed Trials That May Qualify for R&D Tax Credits
Feed trials can qualify for R&D tax credits when the four-part test is met, and get stronger when the farm is trying to resolve a technical uncertainty based on the environment, not based on a vendor recommendation.
Activities that may qualify include:
1. Testing feed additives under commercial farm conditions.
2. Comparing rations to improve growth or feed conversion.
3. Evaluation of probiotic or vaccine protocols.
4. Trialing methods to reduce mortality or disease pressure.
These activities must be wholly independent from normal farm activities, including routine quality-control, routine feed adjustments, trying an existing product exactly as instructed with no variance, or data observance and gathering after the process is in commercial production.
Genomics and Breeding Trials That May Qualify for R&D Tax Credits
There is significant potential for genomics and breeding work to qualify for R&D tax credits, especially as genetic testing and data-driven breeding selection has increased in commercial farming operations.
Activities that might qualify include:
1. Developing or refining genomic selection models to improve traits like disease resistance or feed efficiency.
2. Testing breeding combinations to increase performance across generations.
3. Evaluating the effectiveness of breeding experimentation processes under specific herd or flock conditions.
4. Analyzing genetic marker data to develop proprietary selection criteria unique to your operation.
5. Trialing crossbreeding strategies to improve vigor, survivability, or production metrics.
Like feed trials, these activities must go beyond routine herd management. Selecting animals from an existing breed catalog, following geneticists’ standard recommendations with no variation, or purchasing a genetics package and using it as directed does not meet the threshold the four-part test lays out. The work must involve a hypothesis, testing it, and evaluating those results in a meaningful way.
Other Farm Activities That May Qualify for R&D Tax Credits
Feed and genomics are two common categories, but there are other qualifying activities. Farms regularly engage in experimental work that can meet the four-part test, including:
- Crop production techniques: Testing new planting densities, irrigation strategies, or soil amendment programs under real field conditions.
- Disease and health protocol development: Designing and testing biosecurity measures, vaccination schedules, or treatment protocols – but only when the outcome was not known in advance.
- Water and waste management systems: Developing operational methods that address geographical or production model challenges specific to the farm.
- Precision agriculture and data systems: Building or testing software, sensors, or data collection tools to monitor and improve production outcomes.
What Does Not Qualify for R&D Tax Credits?
Activities that are specifically excluded are:
- Routine or ordinary testing and inspection for quality control.
- Research conducted after commercial production has begun.
- Adaptation of an existing product or process to a particular customer’s needs.
- Funded research. If a grant, government program, or third-party contract funded the activity and the farm did not bear the financial risk, the expenses may not qualify, despite the activity meeting the criteria.
- Social science, market research, and management studies.
In agriculture, the line between “we tried something new” and “we conducted qualifying research” often comes down to the documentation.
Documentation Best Practices for Farm R&D Credits
Documentation doesn’t need to be formal or lab-grade. What is does need to be is consistent and contemporaneous. Notes that were kept throughout a trial bear far more weight than reconstruction after the fact. Documentation reflecting product improvements provides guidance to taxpayers to help them determine the amount of expenses that can be qualified.
Farms should consider maintaining:
- Project logs.
- Data records.
- Employee time records.
- Feed, supply, and input records.
- Photographs, lab results, or third-party reports.
Working with an Advisor on Agricultural R&D Credits
The R&D tax credit calculation involves identifying qualifying research expenses, including wages, supplies, contractor research costs, and possibly more, and applying the correct corresponding credit rate. This often requires working through which employees spent time on qualifying activities, which inputs were used exclusively for experimental purposes and not routine activities, and whether activities were excluded by funding rules or commercial production limitations.
RK Partners has worked with many agricultural operations on these claims, and we can help evaluate which activities may qualify. We can help you build a defensible claim and ensure that the credit is properly supported in the event of an IRS inquiry. Given the complexity of the four-part test and documentation requirements, professional guidance typically far out-weighs the risk of submitting a claim that may not withstand scrutiny.
If you think your operation may be conducting qualifying research, schedule a risk-free consultation with us. Our tax professionals understand both credit rules and realities of agricultural production.
