During these depressed economic times, taxpayers are increasingly confronted with issues related to cash flow management and the need to reduce taxes. In many cases, taxpayers are looking at all possible tax-saving opportunities. There is a little-known tax credit opportunity that may bring additional benefit to taxpayers that deal with fertilizers and pesticides.
General Overview
In 2008, Congress enacted the Food, Conservation, and Energy Act of 2008, PL 110-234 (the Farm Bill), over President George W. Bush’s veto. This act included the agricultural chemical security credit, which is codified as IRC § 45O and is generally equal to 30% of the costs incurred toward securing “specified agricultural chemicals.” The credit includes specific limitations and overall is capped at $2 million per taxpayer per year. As a general business credit, it is reported on Form 3800, General Business Credit, and also on Form 8931, Agricultural Chemical Security Credit.
Eligible Taxpayers
Eligible taxpayers include sole proprietorships, partnerships or corporations in the trade or business of:
- Selling agricultural products, including specified agricultural chemicals, at retail, predominately to farmers and ranchers; or
- Manufacturing, formulating, distributing or aerially applying specified agricultural chemicals (section 45O(e)).
In general, specified agricultural chemicals include most fertilizers and related hazardous chemicals that are commonly used within the agricultural industry (section 45O(f)).
Taxpayers that may benefit from this credit include:
- Manufacturers of fertilizers and pesticides;
- Producers of the component chemicals that are used by other parties in the manufacture of fertilizers and pesticides;
- Commercial distributers of fertilizers and pesticides; and
- Taxpayers that aerially apply fertilizers and pesticides, such as farmers and ranchers or those engaged to aerially apply the chemicals to commercially raised livestock or commercially grown crops.
The broad nature of this provision suggests that it may apply to a large spectrum of taxpayers and most likely applies from the point at which the chemicals are produced to the point at which they are applied by the farmer or rancher. In other words, there may be opportunities to claim this credit at various points in the chemical’s life cycle.
Calculating the Credit
A taxpayer may claim the tax credit on the first $333,333.33 of qualified chemical security expenditures (per facility) that are paid or incurred after May 22, 2008, but on or before December 31, 2012. The maximum amount of credit is limited to $100,000 per facility (section 45O(b)(1)), and there is an annual credit limitation of $2 million for each tax year (section 45O(c)). Similar to the credit for research and development, the taxpayer is also required to add back a Schedule M adjustment for the portion of expenses that is equal to the amount of the credit (section 280C(f)). For purposes of determining the amount of the credit for any tax year, controlled group aggregation and allocation rules similar to the rules governing research and development credits must be applied (sections 45O(b) and (c)).
Examples of qualified chemical security expenditures include:
- Perimeter security;
- Measures to control access to the facility and other restricted areas;
- Identification systems;
- Lighting, motion detectors and other related security systems;
- Efforts to deter theft and sabotage;
- Security training, exercises and drills;
- Computer network security; and
- Background checks for employees and visitors.
The Facility Limitation
The Code does not define the term “facility,” as used in section 45O(b), and there is no guidance from the Treasury Department or the IRS. Regulations related to this Code section were not included in the IRS’ 2009–2010 Priority Guidance Plan, released Nov. 24, 2009. However, until the IRS publishes regulations or provides further guidance, taxpayers should look to analogous law. Specifically, the investment tax credit regulations and production tax credit rules define each energy-producing structure as a separate facility for purposes of computing the available tax credit. By analogy, this same approach might be applied to deem separate structures as separate facilities for purposes of applying the section 45O(b) facility limitation. Any analysis would need to be performed on a case-by-case basis, and all facts and circumstances would need to be weighed. The end result of a careful analysis by the taxpayer may be that multiple facilities exist within a particular site.
Example. Taxpayer A is a manufacturer of fertilizers. A produces no other chemicals. A sells the fertilizers to taxpayer B. B sells the fertilizers to taxpayer C, who is in the business of farming. During 2009, A performs an analysis and determines that it has six facilities related to the production of fertilizer. For each facility, A incurs expenditures related to securing the fertilizer production process. Based on this information, A would calculate the credit as in the exhibit. A has a total credit before limitation of $495,900. Because it does not exceed the $2 million annual limitation, A is entitled to claim the entire amount. In addition, since A did not meet the $100,000 cumulative credit per facility limit, there may be an opportunity to claim a credit for qualified expenditures for those facilities in future years (through Dec. 31, 2012).
Finally, as noted earlier, A must add back the qualified expenditures as an unfavorable Schedule M adjustment. The total unfavorable adjustment is $495,900, which is the amount of qualified expenditures that is equal to the credit. Although A took the credit, the opportunity to take the credit may also be available to B and C.
Exhibit: Calculation of Credit
| Facility* | ||||||
| 1 | 2 | 3 | 4 | 5 | 6 | |
| Qualified Expenditures | ||||||
| Security training | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 |
| Access control | 50,000 | 50,000 | 50,000 | 50,000 | 50,000 | 50,000 |
| Theft prevention | 35,000 | 25,000 | 30,000 | 45,000 | 55,000 | 75,000 |
| Perimeter protection | 22,000 | 22,000 | 22,000 | 22,000 | 22,000 | 22,000 |
| Security systems computer network | 125,000 | 130,000 | 111,000 | 115,000 | 175,000 | 150,000 |
| Security | 15,000 | 15,000 | 15,000 | 15,000 | 15,000 | 15,000 |
| Total | 257,000 | 252,000 | 238,000 | 257,000 | 327,000 | 322,000 |
| Credit (30% x qualified expenditures) | 77,100 | 75,600 | 71,400 | 77,100 | 98,100 | 96,600 |
| Total credit | 495,900 |
*Key to facilities:
Facility 1: Storage container A for chemical 1
Facility 2: Storage container B for chemical 2
Facility 3: Storage container C for chemical 3
Facility 4: Mixing container A, used to mix chemicals 1 and 2
Facility 5: Mixing container B, used to combine chemicals 1 and 2 with chemical 3
Facility 6: Warehouse, used to store the manufactured fertilizer product
Conclusion
Although enacted in 2008, this credit remains unknown to many taxpayers. Taxpayers that deal with fertilizers and pesticides should consider their own facts and circumstances to determine how the credit might apply.
Mas Kuwana and Gary Hecimovich are with Deloitte Tax LLP.
This article originally appeared in the March 2010 issue of The Tax Adviser , the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price. Call 800-513-3037 or e-mail taxsection@aicpa.org for a subscription to the magazine or to become a member of the Tax Section.
