Save Money While Improving Processes
Every business owner is faced with the challenge of finding ways to reduce their tax liability. For commercial farms and growers of local crops, federal and state research and development (R&D) tax credits are an effective solution to save money. Defined in most states as a general business credit that is a dollar-for-dollar reduction in tax liability, R&D tax credits offer those in the agricultural industry an opportunity to save money, while aiding in the development of solutions that will enhance production and push them forward in a competitive market. Despite the common misconception that only patentable ideas and inventions qualify for such credits, the development of products, processes, techniques, formulas and computer software also qualify for R&D tax credits. Even improving upon one of these “business components” can qualify for these benefits, so long as the purpose is to add or improve upon its function, performance, quality or reliability.
How Do You Qualify for an R&D Tax Credit?
The most common, but not the only, qualified R&D activity is aimed at developing or improving upon existing products and processes. An example of this would be a grower of wine grapes attempting to improve upon the quality of their crops by crossbreeding the strains of crops that produce the highest quality grapes, in terms of resultant flavor, shelf life and other factors. Another example is a strawberry farmer experimenting to improve their water use efficiency during their irrigation process.
The important thing to note is these credits are not measured by the success of the activity. Even if the project fails, the business will still qualify for beneficial tax savings.
How is the R&D Tax Credit Determined?
As an activities-based incentive, both federal and California R&D tax credits are determined as a percentage of the employee taxable wages, non-depreciable supply costs and outside contractor payments made for R&D activities. For the wages category, this includes not only the wages paid for directly conducting R&D, but also the direct supervision and direct support of R&D activities as well.
Why Take Advantage of R&D Tax Credits?
The R&D tax credit is the single most powerful tax incentive in the United States – adding up to billions in tax savings for businesses large and small each year. While there are some complicated mechanics behind the computations, the “back-of-the-napkin” results are about 6.5% of qualified R&D expenses as a direct federal tax reduction, and for California, the credit is about 7% qualified expenses as tax savings.
What this means is that even the smallest growers and farms may have hundreds of thousands of dollars of total tax savings each year for performing activities they need to perform, just to remain competitive.
How it Works
While some states require an application, for Federal and California purposes you do not need to pre-apply for R&D Tax Credits. Both federal and California R&D tax credits are claimed on their respective tax return filings at the end of each year. Additionally, if you did not claim credits in the past, you can amend for up to three prior years for federal and four prior years for California, and request a refund for such credits. While amending your tax returns is a good option if you already filed, by filing on an original return, you can instantly reduce your tax liability. There are also a couple of advantageous elections that are only available on original returns.
Since R&D Tax credits are of tremendous value to those that qualify, it is important to have the right expert team helping them assess the benefits, calculate the claim and document the results. Additionally, while the incentive is widely applicable, it entails a lot of special rules, inclusions, exclusions and other nuances that only experts can truly navigate.
First, seek out the help from your general accountancy firm to assess your tax paying situation and viability of claiming R&D tax credits. Assuming you “pre-qualify”, seek out assistance from a specialty tax services firm who specializes in R&D tax credits to help calculate and document the benefits.
We Can Help
PMB Helin Donovan is one such public accounting firm that has a comprehensive tax practice and is always advocating for their clients in their efforts to reduce tax liabilities. The agricultural industry is amongst the firm’s expertise.