Many businesses that deal in pesticides and fertilizers may be missing an opportunity to claim a tax credit, according to two tax specialists, Yair Holtzman and Adam Packer with WTP Advisors, writing in a recent issue of the BNA Daily Tax Report. 

Buried in the 2008 Farm Bill legislation is a wide-ranging tax credit called the “Agricultural Chemicals Security Credit” (ACS – download the PDF), developed by legislators in an effort to preserve homeland security and to keep potentially harmful chemicals from those who would use them for nefarious purposes. For instance, the weapon of choice in the 1995 Oklahoma City attack was fertilizer containing ammonium nitrate mixed with racing fuel to make a bomb.  And after 9/11, authorities discovered that some of the perpetrators had tried to gain access to crop dusters and other light aircraft in southwest Florida in order to spray pesticides or other toxins on a human population center. 

Essentially, the ACS tax credit rewards taxpayers who take appropriate measures to keep agricultural chemicals like pesticides and fertilizers secure. The credit is designed to offset 30% of the cost of certain types of security expenses that agricultural businesses have spent after May 22, 2008.  

“However, despite the potentially broad nature of this tax credit, many eligible businesses that could qualify for the credit may not be claiming it,” says Holtzman.

The reason is likely due to the fact that the credit requires an understanding of chemistry in order to deduce which chemicals qualify. However those who are well versed in tax matters may not have the necessary scientific background which would enable them to look at complex chemical names and know whether they would be included in any kind of commonly used fertilizers.  

“As a result, tax professionals probably shy away from this credit, given the difficulty determining what will qualify, especially with the lack of guidance from the IRS.  Additionally, agricultural industry chemists who are well acquainted with the chemicals typically used in common fertilizers probably aren’t familiar with an obscure tax credit that has barely received any Congressional attention,” says Packer.

The best solution, therefore, may be for taxpayers to find a tax consultant who can provide expertise in both areas. 

“In order to take full advantage of the ACS tax credit, agricultural businesses should engage tax experts with a chemistry background in order to fully understand the array of qualified fertilizers and pesticides and take full advantage of the credit,” the authors say. 

The credit only extends to ‘qualified chemical security expenditures’ that relate to the purpose of protecting ‘specified agricultural chemicals.’  These security measures can include a wide range of activities including: employee security training and background checks; tagging, locking tanks valves and chemical additives to prevent the theft of specified agricultural chemicals or to render such chemicals unfit for illegal use; protection of the perimeter of specified agricultural chemicals; and installation of security lighting, cameras, recording equipment and intrusion detection sensors. 

The statutory definitions of what constitute an eligible agricultural business and a ‘specified agricultural chemical’ are very broad.  The IRS defines an eligible agricultural business as one that sells agricultural products, including specified agricultural chemicals, at retail predominantly to farmers and ranchers; or manufactures, formulates, distributes or aerially applies specified agricultural chemicals. 

“As a result, businesses from all stages in the production of fertilizers and pesticides likely will qualify for this credit, from the initial manufacture of input chemicals to distribution and transportation of the final product,” the authors write.