Water scarcity continues to challenge farms, processors, and agtech innovators across the United States. Drought conditions have accelerated the need for smarter irrigation systems, more resilient crop varieties, livestock management, and new ways to monitor and conserve resources.
For many agricultural operations, whether it’s orchards, crops or animals, these adaptation efforts are not only practical necessities but also may qualify as research under the federal and state Research and Development (R&D) Tax Credit. Understanding how this credit applies can help agricultural businesses recognize the value of their ongoing problem-solving and reinvest in future improvements.
What Is the R&D Tax Credit?
The R&D Tax Credit is a powerful federal and state incentive that financially rewards businesses for innovating. It’s designed to offset the costs associated with developing or improving products, processes, or technology.
While commonly associated with high-tech manufacturing and engineering, the credit applies directly to agriculture, where essential experimentation happens in the field, barn, or processing facility.
How the Credit Works
The credit is calculated based on a portion of your qualifying expenses related to eligible projects. These expenses include:
- Wages paid to employees involved in the research.
- Materials and supplies used in testing.
- Contractor costs for outsourced research services.
For startup companies, the credit can potentially be used to offset payroll taxes, providing immediate financial relief.
Eligible Activities in Agriculture
Any project aimed at improving quality, efficiency, sustainability, or technique can qualify. If you are testing, adjusting, or evaluating alternatives, it’s likely eligible.
| Focus Area | Examples of Potentially Qualifying R&D |
| Field/Crop Innovation | Testing new irrigation systems, improving soil moisture management, or introducing new crop varieties (e.g., drought-resistant seeds). |
| Livestock Management | Experimenting with feed and nutrition changes, automating tending or processing equipment, or implementing robotics. |
| Processing & Packaging | Bringing in new equipment, using automation, or improving packaging to reduce waste or increase shelf life. |
Why It Matters for Agriculture
As environmental and regulatory pressures evolve, agricultural innovation is essential. Producers explore new technologies, sustainable practices and data-driven tools to manage resources more effectively. Recognizing that these activities can qualify for the R&D credit ensures that innovation is not only environmentally sound but also financially sustainable.
Many farms and agtech companies already perform the type of applied research the credit was designed to support. By identifying these efforts early, organizations can better leverage available incentives and document the technical work behind their results.
Some examples of naturally occurring day-to-day activities that may meet the IRS definition of qualified research include:
Water Management & Crop Science
- Developing or refining irrigation systems to optimize water use.
- Testing soil moisture or nutrient sensors to improve crop health.
- Experimenting with drought-tolerant or heat-resistant seed varieties.
- Developing and implementing water recycling or treatment systems that support sustainability goals.
- Implementing regenerative practices on the farm.
Livestock & Nutrition
- Testing and analyzing the impact of different breeds with different nutritional feeds.
- Developing processes and techniques to reduce mortality.
Post-Harvest & Processing
- Creating new techniques to reduce waste or preserve product quality.
- Leveraging new packaging to reduce waste, increase shelf life or recyclability.
- Implementing new equipment or automation to reduce product damage.
The key factor is that the work involves experimentation — testing, adjusting, and evaluating alternatives to achieve measurable improvements.
Looking Ahead
Agriculture will have to continue evolving, with growers adapting strategies and techniques to changing climate conditions and limited resources. Programs like the R&D Tax Credit help support that progress by recognizing the time, effort and ingenuity that go into developing more sustainable operations.
Understanding the connection between innovation and incentive can help farms and ag-based businesses plan strategically for the future and continue building a foundation for growth and resilience.
How to Get Started
Businesses can begin by:
- Reviewing projects that involved testing or technical problem-solving.
- Tracking who was involved and what resources were used.
- Keeping documentation of trials, prototypes or data collection.
- Consulting with a qualified tax professional to confirm eligibility and determine how to claim the credit.
Even small pilot projects or incremental improvements may qualify if they follow a process of evaluation and refinement.
To learn more about how these rules apply to your operation, connect with Sensiba’s R&D Tax Credit Team. Our team will work with you to review your activities and help determine whether your innovation efforts may qualify.
