I have received a lot of questions recently regarding credits. In February, proposed regulations came out for the 45Z Clean Fuel Production Credit, and a court case came out regarding research and development (R&D) Section 174 for agriculture. Agricultural credits have become a hot topic, so I thought we would dive into and learn more about them.

Section 45Z is meant to provide a tax credit for low-carbon transportation fuels produced and sold in the U.S. to incentivize production. The credit was originally consolidated into two categories: biofuel and sustainable aviation fuel. The credit is based on a complex calculation to determine how much clean fuel reduces carbon emissions compared to petroleum-based fuels. There are also a prevailing wage and an apprenticeship element to the credit.

The new proposed regulations would change a few areas. The credit would no longer be split into biofuel and aviation; it would be under the same umbrella. Under the proposed regulations, fuels must be derived exclusively from the U.S., Canada or Mexico feedstocks starting in 2026. The carbon calculator under development will be integrated to adjust for feedstocks produced using no-till farming, cover crops and nutrient-management practices.

If approved, this would help ethanol plants and support U.S. agriculture. Hopefully, we will also have some guidance on low-carbon corn, soy and other crops to see how that could affect producers.

Another hot topic is the R&D Section 174 credit for farms. If you engage in product development research related to design, prototyping and development of new or improved products, or if you experiment with new or improved technical processes and capabilities, you might qualify for the credit.

What does this mean for you? Here are some examples of R&D in agriculture:

-- Design or improvement of equipment intended to make breeding, raising or harvesting more efficient.

-- Nutrition experiments involving new or improved feed or feeding techniques.

-- Testing new irrigation, fertilization or pest-control methods.

-- Development of new or improved breeding practices.

-- Nutritional experiments involving new or improved seed structures.

-- Seed and crop yield storage and maintenance technique development.

Once you determine that you are performing R&D activities, what expenses are eligible for the credit? Qualifying expenses include wages paid to employees involved in the research, supplies used in the research and/or some portion of research costs paid to outside parties.

This is a very high-level view of the R&D credit. There is so much more that goes into eligibility and the calculation of it. The question you should ask yourself is this: Am I doing something new/novel or something that improves a product, processes or techniques? If you are, the credit might be worth looking into.

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DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at https://www.dtnpf.com/…. You may email Rod at taxman@dtn.com.

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