01 Nov Royse Law Proposes an AgTech Investment Tax Credit
Agricultural providers and producers face numerous legal and regulatory challenges. They must comply with an increasing number of state and federal requirements, including labor and employment laws, environmental regulations, land use, pesticide use, food safety, and more. Agriculture technology (“AgTech”) is the leading solution to managing this mounting compliance burden.
The general costs of research and development (“R&D”) in the AgTech sector, however, are not eligible for certain tax incentives under the Internal Revenue Code (the “Code”). The Royse Law Firm advocates for a new federal tax incentive, the AgTech Investment Tax Credit (the “AgITC”), to incentivize the purchase and installation of new AgTech equipment. This will encourage broader implementation of AgTech by growers who risk their limited investment funds on the purchase of new AgTech while also encouraging more innovation in the U.S. by boosting the market for newly developed AgTech.
In this article, we provide an overview of new AgTech and a brief discussion concerning the associated costs of development that qualify for the federal R&D tax credit. Next, we discuss the role of federal tax policy in the creation of innovation initiatives and the unpremeditated barriers to tax incentives associated with the purchase and installation of new AgTech equipment under the federal R&D credit. Finally, we propose the AgITC as a new federal tax incentive to address the mounting difficulties that are being encountered in this space.
AgTech is the Future of Farming
AgTech covers numerous different as well as overlapping technologies, including cloud-based software, big data, drone technology, pharma, life sciences, and sustainable environmental applications. AgTech also overlaps with the food industry as new technologies improve not only the production side of food and wine, but also distribution and marketing. Today, AgTech most commonly consists of the sensors that monitor, analyze, and respond to changing farm conditions. Drone companies can also cater to agricultural needs, however, and robotics are starting to provide intelligent farm machines that perform various farm functions.
Price competitiveness, labor shortages, and stringent environmental regulations have created a high demand for agricultural solutions and thus facilitated the fast-pace growth of technology companies in the AgTech sector. Silicon Valley, in particular, provides a hub of opportunity for co-innovation in this space between academic research institutions, tech startups, and inventors. As a result, new technologies are constantly being developed and funded in Silicon Valley to increase yields and lower production costs while maintaining legal, safe, efficient, and sustainable farming practices.
R&D Tax Credit Limitations
Growers and producers in the agriculture industry that engage in R&D activities can receive a federal tax credit for “qualified expenses.” These expenses include the salaries of employees involved in R&D, the wages paid to contractors or consultants hired to help with R&D, and the purchase of supplies that were used within the R&D process. Unlike the federal investment tax credit (the “ITC”) for solar technology, however, the purchase and installation of new AgTech equipment does not qualify for the federal R&D credit unless the taxpayer uses it for “qualified research.” To be qualified, the research must be experimental and conducted before the component is developed to the point where it is ready for commercial sale or use. By definition, then, the purchase and installation of any AgTech equipment for non-experimental use is categorically excluded from the federal R&D credit no matter how new or innovative the technology.
Federal Tax Policy Can Incentivize Innovation in the AgTech Sector
Crop producers, researchers, and farmworkers provide our nation with safe and nutritious food. That is an enormous responsibility and requires federal support. Federal funds can also provide scientific advances that enable our country to use the most efficient and environmentally sound agriculture technology in the world. Funding this research is imperative due to the industry’s increasing reliance on science and technology to maintain profitable production. Likewise, labor dependency is an ongoing concern regarding profitability in the absence of labor saving technology. Accordingly, federal investment in AgTech has the ability to stabilize prices, reduce our dependency on manual labor, and create permanent jobs with higher wages for domestic workers. Thus, federal tax policy plays a huge role in the facilitation of innovation initiatives for the adoption of new AgTech.
In fact, federal tax credits for renewable technologies have been a part of the Code for decades. For example, the Energy Tax Act created an investment tax credit for the purchase and installation of new equipment using energy sources other than oil and natural gas. Here, federal tax policy was geared towards reducing U.S. consumption of oil and natural gas by encouraging the adoption of alternative technologies. Currently, the ITC is limited to the purchase and installation of new solar and geothermal technology. The same way the ITC encourages the purchase and installation of solar technology, however, the proposed AgITC can encourage the adoption of new AgTech.
AgTech Investment Tax Credit
In particular, we propose section 48 of the Code provide an ITC for AgTech-related investments. The incentive may be enacted as part of the next farm bill or tax reform bill. Similar to the Solar ITC, the AgITC would provide a 30% credit for the cost of acquiring AgTech, as determined by the basis of eligible property that is placed in service during the taxable year. In other words, the purchase price and cost of installation for new AgTech equipment would be eligible for the AgITC.
The AgITC should be refundable so that credits can be received as a payment if the taxpayer does not have current tax liability to offset. The credit would not be nearly as effective an incentive for the adoption of new AgTech if it were nonrefundable because there would be no direct offset for the purchase price of risky investments. The AgITC should also be a permanent addition to the Code in order to facilitate long-term planning, similar to the federal R&D credit for qualified expenses.
The ITC has proven itself critical to the adoption of new technology in the United States. More than $72 billion has been invested in U.S. solar installations and more than 170,000 solar jobs were created after Congress enacted the solar incentive in 2006. The provision of a tax credit for AgTech is equally likely to drive the creation and adoption of innovative agriculture technology by incentivizing the purchase and installation of new AgTech equipment. As a result, the AgITC would be a strong investment in both the U.S. economy as well as the security of an abundant and safe food supply.