Agribusiness Case Study
Overview
In 2018, Sycamore Growth Group’s client embarked on a large initiative to research and develop a facility for the cultivation of cannabis. Today the client is a Level I medical cannabis cultivator licensed by the Ohio Department of Commerce, which regulates all Ohio medical marijuana initiatives.
Because the legal cannabis industry is relatively new and strictly monitored, there has been some hesitancy among cultivators to seek tax opportunities for cannabis activities. Thus the client was unsure that safe and compliant research and development (R&D) tax credits were available to them.
Goal Of The Study
Sycamore’s overarching goal was to substantiate all the State of Ohio Qualified Research Expenses (QRE) and associated R&D tax credits the client was allowed under law, while exercising caution to ensure claims were not overstated, and preparing written reports documenting each project’s eligibility.
Client Provided Information
The client provided construction meeting minutes, draw reports, invoices, payroll data, and financial statements. The company also conducted a plant tour for Sycamore and made 5-6 staff available for interviews. In all, the client expended fewer than 40 hours over the life of the study toward the R&D tax credit study.
Substantiation of Activities
Sycamore’s technical writers reviewed site tour videos, interviews, construction minutes and draw reports, invoices, and quotes. The team also conducted additional outside research to gain a deep understanding of the industry. From this information, the team wrote R&D project reports for each of the projects claimed, which included:
HVAC system
Electrical system
Fertigation system
Waste water handling system
Lighting system
Integrated Internet of Things (IoT) monitoring system
Structural build
Civil engineering projects
These R&D project reports explained technical challenges presented by the client’s specific work and the methods used to overcome them, all while meeting the requirement under the code for eligible R&D expenses (4-part test). All of these projects met the “substantially all” test making all of the related expenses potentially eligible for credit calculations.
The writing team also built a digital audit library that held:
All client documents collected
R&D project reports
R&D tax credit study (which detailed Sycamore’s methodology and numbers)
A Read Me document for auditors and reviewers to understand what is in the library and how the information is organized
Eligible Expenses
All of the expenses associated with each of the claimed projects were examined to determine eligibility under the code. Of particular interest was the nature of the expenses that were capitalized. Per rule, no “in-house” supplies, which are depreciated can be included in the calculations. However, all of the capitalized labor and contract research remained eligible.
Results
Sycamore secured approval of $550,000 in R&D tax credits from the State of Ohio, which was used against the client’s commercial activity taxes (CAT). Within 90 days of the R&D tax credit submission, the client received $375K in refunds for the years 2018-2021. A carryforward balance of $175,000 is being used quarterly against CAT taxes.