What Are R&D Tax Credits?
What it Means for R&D Tax Credits in Agriculture
What are R&D Tax Credits?
Research and Development (R&D) Tax Credits have been around since 1981, but the Protecting Americans from Tax Hikes (PATH) Act in 2015 made the federal R&D Tax Credit permanent.
Since its inception, the R&D Tax Credit allowance has expanded to include a wide range of industries, including biological, aquaculture, agriculture, manufacturing, software as a service (SaaS), software development, and more. Of the millions of companies that are able to take advantage of these credits, it’s estimated that over 65% of them are unaware or are not filing for these.
What are the rules for qualifying?
Generally, the qualification under the tax code and regulations revolve around a four-part test:
1. Permitted Purpose: The intended purpose of the activity must be something to create a new or improved product or process to improve existing functionality, performance, reliability, or quality of a business component. Business components are defined as a process, product, technique, formula, or software that the taxpayer intends to hold for sale, lease, license, or use in the taxpayer’s business.
2. Technological in Nature: The research must fundamentally rely on principles of physical or biological sciences, engineering, or computer sciences, and can rely on existing technologies to satisfy the requirement.
3. Elimination of Technical Uncertainty: The taxpayer must intend to eliminate uncertainty of the new or improved product or process, which includes when the taxpayer is uncertain as to its capability of improving the product, the best method of improving the product or the appropriateness of the product design. Technical uncertainty is measured at the outset of the project.
4. Process of Experimentation: The taxpayer must engage in a process of experimentation that is capable of evaluating one or more alternatives to eliminate the technical uncertainty related to the product, process, or design.
What Qualifies as R&D Expenses?
1. Wages paid to an employee for the performance of a qualifying service directly related to engaging in qualifying research, directly supervising qualifying research, and/or supporting qualifying research.
2. Supplies used during qualifying research activities, including but not limited to prototypes and testing materials. These expenses can be found in the general ledger or job costing reports.
3. Contract research expenses where a third party performs qualified research services on behalf of the taxpayer. These are included at 65% of the actual expense.
4. Rental of computers or cloud computing services (IaaS/PaaS) qualifies for the Research & Development (R&D) tax credit if used for qualified research activities, such as software development or engineering. To qualify, the computer must be owned/operated by another party, located off-premise, and the taxpayer cannot be the primary user.
State R&D Tax Credits
State R&D tax credits are incentives offered by 30+ U.S.states to reduce income tax for companies investing in qualified research, such as developing new products, software, or manufacturing processes. These credits often mirror federal rules, offering 3–15%+ of qualified expenses, with some states allowing credit carry forwards, refunds, or selling credits.
RK Partner’s Advantage
We are experts in these specific tax credits and have a proven process to work directly with taxpayers to make sure that we accurately identify both federal and specific state R&D tax credits.
Contact us to schedule your R&D tax credit assessment with one of our experts.
