Analysis of Agriscience as a Qualifying Industry for the Iowa Research Activities Credit (RAC) and Legislative Compliance Landscape

Executive Summary: Strategic Overview of Agriscience Eligibility in Iowa

Agriscience is defined as the specialized research branch of Life Sciences concerned with the study of living organisms, including biology, botany, and biochemistry, applied to agricultural innovation.1 The Iowa Research Activities Credit (RAC), prior to its 2026 overhaul, was available to businesses engaged in Agriscience, provided they strictly separate their scientific experimentation from routine agricultural production.3

The Iowa R&D credit operates under a dual-eligibility mandate: the research activity itself must meet the rigorous standards of the federal Internal Revenue Code (IRC) Section 41, and the researching entity must be explicitly classified within one of Iowa’s five enumerated qualifying industries, which includes Agriscience.1 The paramount compliance challenge for entities in this sector is the strict statutory prohibition against businesses “engaged in agricultural production,” necessitating stringent documentation to substantiate that research activities satisfy the technological uncertainty test and do not merely constitute routine commercial farming operations.3 Furthermore, significant legislative changes taking effect in 2026 fundamentally alter the program’s administration, credit rate, and eligibility definitions, requiring immediate strategic planning for all Agriscience claimants.

I. Defining Agriscience as an Iowa Qualifying Industry and Statutory Context

1.1 Statutory Definition of Agriscience: Simple and Detailed Analysis

Agriscience does not exist as a primary, standalone definition within Iowa Code but is specifically identified by the Iowa Department of Revenue (IDR) guidance as an inclusion within the broader qualifying category of Life Sciences.1

The Nexus with Life Sciences

Iowa Administrative Code (IAC) rules specify that “Life sciences” encompasses “the sciences concerned with the study of living organisms, including agriscience, biology, botany, zoology, microbiology, physiology, biochemistry, and related subjects”.1 This statutory linkage establishes that Agriscience research activities must be rooted in the principles of biological or physical science, allowing for R&D claims based on genomics, biological engineering, biochemistry, and related fields directed toward agricultural applications.5

The Five Qualifying Industries

To be eligible for the RAC (for tax years beginning before January 1, 2026), a business conducting research must be engaged in one of five specified, technology-intensive industries: (1) Manufacturing, (2) Life Sciences (inclusive of Agriscience), (3) Software Engineering, (4) Aviation and Aerospace, or (5) development and deployment of innovative renewable energy generation components.1 The eligibility test requires meeting both the qualifying industry requirement and the federal R&D nexus concurrently.3

1.2 The Economic Rationale for Agriscience Incentives

The focus on incentivizing Agriscience aligns with Iowa’s foundational economic structure. State data indicates that agriculture and related industries are responsible for an estimated 22% of Iowa’s total value added (Gross Domestic Product equivalent) and support nearly one out of every five jobs.7 In 2024, the agriculture industry and related activity were estimated to contribute $53.1 billion in total value added.7

The immense economic footprint of the agricultural sector highlights the legislative rationale behind the R&D credit structure: the state seeks to stimulate advanced, technology-driven research and innovation (Agriscience R&D) that contributes to the modernization and efficiency of this vital sector.7 This focused incentive allows Iowa to target capital toward innovation (e.g., hybrid seed technologies, precision agriculture engineering) while explicitly excluding the high-volume, routine operational costs of commercial farming, thereby managing the fiscal exposure of the credit program.1

The structure of the RAC is defined not only by who is included but, critically, by who is excluded. The IDR maintains an extensive list of businesses that are ineligible, regardless of whether they conduct qualifying research.1

Table 1: Key Inclusions and Exclusions for the Iowa Research Activities Credit (RAC)

II. Foundational Eligibility: The Intersection of Iowa Code and IRC §41

Iowa’s incentive scheme ensures technical rigor by making the state credit conditional upon the federal qualification of the research activity.

2.1 The Mandatory Two-Prong Eligibility Test (Iowa Code §422.10)

For a business to successfully claim the RAC, two mandatory requirements must be met simultaneously for the same taxable year 1:

1. Qualifying Industry Engagement: The business must be engaged in one of the five specified industries (e.g., Agriscience).1
2. Federal Nexus: The business must claim and be allowed a research credit for the qualified research expenses under Section 41 of the Internal Revenue Code (IRC §41).1

This second requirement is critical because it mandates that the research activities satisfy the federal definition of qualified research. Any failure to meet the federal standard, or any federal audit adjustment regarding the qualified research activity (QRA), will directly nullify the corresponding Iowa claim. Consequently, Iowa compliance necessitates adhering to the highest standards of federal R&D documentation.

2.2 The Federal Standard: Application of the IRC §41 Four-Part Test

For any activity within Agriscience to generate a state tax credit, it must satisfy the four criteria of qualified research established under IRC §41, which serves as the ultimate arbiter distinguishing routine improvements from incentivized innovation.5

1. Purpose: Elimination of Technological Uncertainty: The activity must be intended to discover information that would eliminate uncertainty concerning the development, improvement, or optimization of a business component, such as a process or product.5 In the Agriscience context, uncertainty frequently surrounds the unpredictable nature of biological systems. For example, uncertainty exists in whether a new feed compound will achieve specific nutrient uptake efficiencies in livestock or if a custom-designed sensor system can reliably monitor soil moisture across varied terrain.11
2. Process: Systematic Experimentation: The research must employ a systematic process of experimentation designed to evaluate one or more alternatives intended to eliminate the identified uncertainty. This process may involve modeling, simulation, or a structured trial-and-error methodology.13 For Agriscience, this is manifested in controlled test plots for new seed varieties, multi-generational breeding trials, or iterative prototyping of automation robotics.11
3. Outcome: Technological in Nature: The experimentation process must rely fundamentally on the principles of hard sciences: engineering, computer science, physics, chemistry, or, critically for this industry, biological science.5 Since Agriscience is defined by its relationship to biology, botany, and biochemistry 1, this criterion emphasizes that the activity must move beyond simple trial-and-error toward a scientific investigation of the underlying biological or physical principles.
4. Goal: Permitted Purpose: The research must aim to improve the functionality, performance, reliability, or quality of a new or existing business component.5

The necessity of satisfying the IRC §41 test means that Agriscience companies must maintain documentation that is comprehensive enough to defend against both federal and state audits, proving that resources were spent attempting to overcome genuine scientific or technological unknowns, not merely applying existing knowledge or improving aesthetic design.

III. Critical Distinctions: Agriscience R&D vs. Excluded Agricultural Production

The primary compliance vulnerability for Agriscience firms is the statutory prohibition against businesses engaged in routine agricultural production. This distinction determines whether an entity is a researcher eligible for the credit or an excluded commercial farmer.

3.1 Legal Exclusion of Agricultural Producers and Cooperatives

Iowa Code §422.10(1)(b)(i) explicitly states that eligibility is denied to “[a] person engaged in agricultural production as defined in section 423.1”.3 The IDR guidance consistently reiterates this exclusion, along with the prohibition against agricultural cooperative associations.4

While Iowa Code §423.1 refers to the use of “Farm machinery and equipment” 15, the practical application of this exclusion targets the core operational business of commercial farming—the production of crops or livestock for market using established, conventional methods.17 The intent is to support the innovators who create the technology (Agriscience) rather than subsidize the operations of those who merely use the technology (Agricultural Production).

The legal difficulty in determining the “primary use” of agricultural property under Iowa law 18 underscores the need for businesses to clearly demonstrate that their core activities and associated expenditures are devoted to systematic research and technology development, rather than routine commodity output.

3.2 Analysis of the R&D vs. Farming Operational Activities Dichotomy

Qualifying Agriscience R&D involves systematic, scientific effort to address technological uncertainty, while excluded Agricultural Production involves the routine application of established commercial practices.11 The determination hinges entirely on the underlying intent and methodology.

Qualifying Agriscience R&D Examples (Eligible Activities):

• Genetics and Breeding Research: Activities such as gene transfer, large-scale genetics research, or the development of new breeding practices and protocols designed to introduce novel, climate-resilient traits into crop species or livestock.14
• Biological Process Innovation: Experimentation surrounding disease control methodologies, innovative waste control experimentation, or nutrition experiments involving proprietary or improved feed formulations or seed structures to solve a functional problem.11
• Process Engineering and Prototyping: The design, prototyping, and testing of specialized equipment intended to achieve efficiency improvements in breeding, raising, or harvesting that are non-obvious to an expert in the field. This includes automation techniques, custom irrigation systems, or advanced monitoring sensors used in test environments.11

Excluded Agricultural Production Examples (Ineligible Activities):

• Routine planting, harvesting, and storage of existing, commercially available crops or products.17
• Standard commercial feeding or raising of livestock using established industry feeds and protocols.14
• The implementation, maintenance, or basic repair of standard farm machinery or commercial equipment, such as heating or cooling installation, which are explicitly excluded activities under Iowa Code.3
• Activities excluded under IRC §41, such as market research, routine data collection, or quality control.6

For sophisticated enterprises engaging in both R&D and commercial farming, the successful defense of a RAC claim requires strict structural separation. The financial and operational functions related to R&D—including dedicated research facilities, research payroll, and non-commercial test plots—must be clearly delineated from the commercial farming enterprise to prevent the entire entity from being classified as an “agricultural producer” by the IDR.4

Table 2: Agriscience R&D vs. Agricultural Production Activities

IV. Qualified Expenditures and Calculation Methodology (Pre-2026 RAC)

The Research Activities Credit (RAC), prior to the 2026 changes, was calculated based on incremental increases in Qualified Research Expenditures (QREs) incurred in Iowa, consistent with federal law.6

4.1 Categories of Qualified Research Expenditures (QREs)

QREs must be attributable to qualified research services performed in Iowa. The specific categories recognized by Iowa Code are generally aligned with IRC §41, but state legislative actions have introduced subtle differences.19

1. Wages: Salaries for employees who perform, supervise, or directly support qualified research services performed within Iowa.19
2. Cost of Supplies: The cost of materials and tangible personal property (e.g., chemicals, test crops, biological media) consumed or expended in conducting qualified research in Iowa.19 The Iowa legislature has historically considered or implemented measures to modify or restrict the definition of supplies, which necessitates continuous monitoring for legislative volatility in this category.21
3. Contract Expenses: Sixty-five percent (65%) of amounts paid to an unrelated third party or qualified organization for basic research performed within Iowa.19
4. Rental or Lease Cost of Personal Property: Costs related to the rental or lease of personal property used in conducting qualified research in Iowa.19 However, IDR guidance explicitly indicates that the rental or lease cost of personal property was applicable as a QRE only for research conducted before January 1, 2023, confirming a recent restriction or phase-out of this category.6

4.2 Calculation of the Research Activities Credit (RAC)

The Iowa RAC is an incremental credit, designed to reward businesses for increasing their R&D investment within the state.6

Apportionment and Base Calculation

The calculation begins by determining Iowa’s share of the qualifying expenses. The state’s apportioned share of the QREs is a percentage equal to the ratio of qualified research expenditures in Iowa to the total qualified research expenditures performed everywhere.2

The credit is then calculated based on the increase in Iowa’s apportioned QREs over a defined base amount. This base amount is determined as the product of the fixed-base percentage multiplied by the average annual gross receipts of the taxpayer for the four preceding taxable years.1 Crucially, the Iowa Code includes a floor provision: in no event shall the base amount be less than fifty (50) percent of the qualified research expenses for the credit year.1 This 50% QRE floor significantly limits the eligible incremental expenses, ensuring only research expenditures that represent a substantial increase or volume qualify for the credit.1

Credit Rate and Method

The standard credit rate is 6.5% of the state’s apportioned share of the increase in QREs over the base amount.19 Prior to restrictive changes in 2022 (House File 2317), taxpayers had the option to elect the federal alternative simplified credit (ASC) method, equal to 4.55% of Iowa’s apportioned QREs that exceed 50% of the average QREs for the three preceding tax years.22 The restrictions imposed by HF 2317, signed in 2022, limited the ability of certain taxpayers to elect this simplified method.22

The RAC has historically been refundable, although HF 2317 also introduced limitations on the refundability amount.22 Furthermore, Agriscience companies may be awarded a Supplemental Research Activities Tax Credit by the Iowa Economic Development Authority (IEDA), especially through the High Quality Jobs (HQJ) program, potentially providing an additional credit up to 10% for approved firms with gross receipts below $20 million.20

V. Iowa Revenue Office Guidance and The 2026 Legislative Overhaul

The complexity of the Iowa R&D landscape is compounded by recent and impending legislative changes that fundamentally redefine eligibility and administration.

5.1 IDR Administrative Rules (701—42.11) and Compliance

IDR guidance, found in the Administrative Code and associated forms (e.g., IA 128), strictly enforces the separation between qualifying industries and excluded activities.4 The extensive list of explicitly ineligible businesses—which includes retailers, wholesalers, contractors, accountants, and agricultural producers 1—serves as the primary administrative tool to ensure the credit remains targeted at R&D in technology-intensive sectors.

A unique state provision, separate from the federal standard, allows for research expenses related to the development and deployment of innovative renewable energy generation components manufactured or assembled in Iowa, provided the components do not exceed 200 megawatts in installed effective nameplate capacity.4 These specific costs are not eligible for the federal credit, requiring separate calculation and documentation on Form IA 128.4

5.2 Critical Legislative Milestones and Program Evolution

The history of the RAC shows legislative efforts to control expenditure and focus incentives.

• 2017: Eligibility was retroactively limited to the current five specific industries, ensuring focus on sectors like Agriscience.1
• 2022 (HF 2317): This legislation significantly restricted the program by limiting the refundable portion of the credit and eliminating the option for some taxpayers to elect the alternative simplified credit methodology.22
• Post-January 1, 2023: Rental or lease costs of personal property were removed as a QRE.6

The continuous legislative modification of calculation methods and QRE inclusions reveals that the Iowa R&D credit program has faced ongoing fiscal review, creating an unstable regulatory environment that demands perpetual compliance monitoring for businesses relying on the incentive.21

5.3 The Future of Agriscience Incentives: The 2026 Overhaul (SF 657)

Senate File 657 (SF 657), approved in 2025, represents a comprehensive overhaul of state incentives, replacing the long-standing RAC with a new R&D Tax Credit Program, effective for tax years beginning on or after January 1, 2026.21

Fundamental Program Changes

The new program shifts the administration and nature of the incentive dramatically:

1. Capped and Competitive: The total annual credit awarded is capped at $40 million per fiscal year, a significant reduction from previous claim totals (e.g., $77.6 million claimed in FY 2024).21 This transformation moves the incentive from an automatic, formulaic entitlement to a competitive, limited resource.
2. Reduced Rate: The maximum credit rate is reduced from 6.5% to 3.5% of qualifying in-state QREs.21
3. Shift to IEDA Oversight: Program administration shifts from the Iowa Department of Revenue (IDR) to the Iowa Economic Development Authority (IEDA).25
4. Mandatory Pre-Application: Businesses must pre-apply with IEDA to secure eligibility and funding, submitting CPA-verified QRE reports. Eligibility lasts for up to five consecutive years but requires annual re-certification and proactive engagement with the IEDA.21

Narrowed Eligibility for Agriscience

The new program narrows the qualifying industry list to Advanced Manufacturing, Bioscience, Finance and Insurance, and Technology and Innovation.21

Agriscience, as an explicit term, is replaced by the more focused “Bioscience” and related sectors, which include: second-generation food innovation, food ingredients and supplements, crop production (R&D, not farming), hybrid seed technologies, diagnostic analytics, and immunotherapies.21

This transition means that existing Agriscience claimants must re-characterize their research activities to fit the new, narrower definitions under “Bioscience.” The eligibility determination is no longer solely based on tax code definitions but also on the IEDA’s discretionary approval and assessment of the firm’s contribution to these strategic sectors.21 This introduces a level of political and administrative risk previously absent, transforming R&D tax planning from a compliance exercise into a competitive economic development strategy.

Table 3: Timeline of Key Iowa R&D Tax Credit Legislative Changes

VI. Practical Application Example: Agriscience R&D Case Study (Pre-2026 RAC Calculation)

This example illustrates the compliance steps and calculation methodology for an Agriscience firm operating under the incremental Research Activities Credit (RAC) structure prior to the 2026 legislative changes.

6.1 Scenario: AgroNova Bio-Solutions (Pre-2026 Tax Year)

Business Profile: AgroNova Bio-Solutions (ABS) is an Iowa-based corporation specializing in the development of innovative microbiological soil treatments designed to enhance nutrient uptake in corn crops under low-moisture conditions. ABS employs plant microbiologists and chemical engineers in a dedicated facility in Ames, Iowa. ABS sells the final biological product to commercial growers but does not engage in commercial farming itself.

• Industry Classification: ABS is engaged in Agriscience (a Life Sciences subset). Requirement 1 Met.
• Federal Nexus: ABS successfully claims and is allowed the federal IRC §41 credit for 2025, having satisfied the Four-Part Test for developing its novel bio-treatment process. Requirement 2 Met.

6.2 Application of the Four-Part Test to Qualified Research Activities (QRA)

ABS’s R&D activities focus on developing and scaling up the new bio-treatment formula:

1. Technological Uncertainty: Uncertainty exists regarding the stability and effectiveness of the microorganism blend when applied in a large-scale, non-sterile field environment, specifically concerning viability under varying soil pH levels.
2. Systematic Experimentation: ABS conducts controlled, multi-variable trials on test plots, varying soil compositions and inoculation methods to determine the optimal delivery mechanism and pH resistance (relying on biological and chemical science principles).
3. Permitted Purpose: The goal is to improve the functionality and performance (nutrient uptake efficiency) of the soil treatment process.

6.3 Quantifying Qualified Research Expenditures (QRE) Incurred in Iowa (2025)

The expenditures incurred by ABS in 2025 are detailed below:

• Apportionment Ratio: Iowa QREs ($6,555,000) / Total QREs ($7,400,000) = 88.58%

6.4 Calculation of Iowa Research Activities Credit Earned (RAC)

1. Determine Base Amount (B):

• Assume ABS’s average annual gross receipts for the four preceding years are $60,000,000. Assume the fixed-base percentage is 10%.
• Product (10% of $60,000,000) = $6,000,000.
• 50% Floor Rule: 50% of current year QREs ($6,555,000 * 0.50) = $3,277,500.1
• The Base Amount (B) is the greater of the product ($6,000,000) or the 50% floor ($3,277,500). Thus, $B = \$6,000,000$.

1. Calculate Increase in QREs over Base:

• QREs ($6,555,000) – Base Amount ($6,000,000) = $555,000 (Increase in QREs).

1. Calculate Iowa Apportioned Share of Increase:

• $555,000 * 88.58% (Apportionment Ratio) = $491,619 (Iowa Apportioned Increase).

1. Calculate Iowa RAC:

• $491,619 * 6.5% (Credit Rate) = $31,955.24 (Iowa Research Activities Credit Earned).19

The application of the 50% floor ensures that the state only provides a credit for R&D expenditures that substantially exceed a minimum threshold, reflecting the incremental nature of the incentive program.

VII. Conclusion and Recommendations for Compliance

Agriscience represents a vital, but highly regulated, sector for R&D tax incentives in Iowa. The compliance pathway requires strict adherence to federal R&D standards (IRC §41) while successfully navigating Iowa’s specific industry eligibility rules, most notably the prohibition against agricultural production.

Recommendations for Immediate Compliance (Pre-2026)

1. Strengthened Documentation of Uncertainty: Agriscience companies must maintain documentation that goes beyond merely listing expenditures. It must rigorously prove that all claimed activities were driven by the elimination of scientific or technological uncertainty related to biological systems or engineering challenges.13
2. Formal Segregation of Activities: To mitigate the critical risk of being classified as an “agricultural producer,” any Agriscience entity must ensure that R&D functions, including dedicated personnel, supplies, and test facilities, are structurally and financially segregated from any commercial commodity production or farm operations.4
3. Review of QRE Eligibility: Businesses should review QRE composition annually against legislative changes, particularly concerning the exclusion of personal property rental costs after January 1, 2023, to ensure calculation accuracy.6

Recommendations for Strategic Planning (Post-2026)

1. Proactive IEDA Application Strategy: Given the replacement of the formulaic RAC with the capped, competitive R&D Tax Credit Program, Agriscience firms must shift from retrospective compliance to prospective strategic engagement. Entities must prepare to proactively apply to the IEDA for approval, framing their research activities to align with the new, narrowed “Bioscience” and “Technology and Innovation” sectors and submitting CPA-verified QRE reports by deadlines such as January 31, 2027, for 2026 claims.21
2. Revised Fiscal Forecasting: The reduction of the credit rate to a maximum of 3.5% and the introduction of the $40 million annual statewide cap necessitate re-evaluating the financial viability of R&D projects. Businesses must forecast a significant decrease in potential tax benefit and adjust internal capital planning accordingly, recognizing that access to the credit will be competitive and limited.24
3. Reframing Research Categories: Agriscience enterprises must confirm that their research projects align with the specific high-growth sectors defined by the IEDA under the new law, such as “hybrid seed technologies,” “second-generation food innovation,” or “diagnostic analytics,” rather than relying on the previous, broader “Agriscience” classification.21

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