The 2018 U.S. Farm Bill has had a wide-reaching impact on industrial hemp, as well as a multitude of other cannabis-related products. Before the passage of the updated Farm Bill legislature this past December, hemp was categorized under Federal law as a controlled substance, as defined under Schedule I and II of the Controlled Substances Act. For tax purposes, this classification meant that despite being legal under state law, hemp manufacturers were regarded as illegal drug traffickers, which subjected their operations to Internal Revenue Code Section 280E.
How Code 280E Initially Impacted Hemp-Related Businesses
Under Code 280E, any businesses assigned the status of a controlled substance trafficker are automatically disqualified from both federal and state tax deductions and credits. As a result, when calculating total taxable income, both producers and distributors of these illegal materials are only permitted to subtract the cost of goods sold with no additional expenses allowed.
The U.S. Farm Bill Removes Hemp From Controlled Substance List
The 2018 U.S. Farm Bill changed everything; its passing has effectively removed all hemp and hemp-related products (including hemp-derived CBD) from the federal government's list of DEA-monitored controlled substances. Hemp is now officially placed under the jurisdiction of the U.S. Department of Agriculture. It's important to note that CBD still falls under Federal Drug Administration regulation, and is still considered illegal for use in food and supplement byproducts while the FDA further develops more substantial regulatory directives.
Hemp Producers and Distributors Can Leverage the R&D Tax Credit
From a tax standpoint, the plant's new status as a non-controlled substance is cause for celebration throughout the hemp industry. Hemp producers and distributors can now officially tap into the many advantages the research and development tax credit offers to more traditional enterprises. Research and development plays a vital role in both sustaining the industry's current corporate footprint as well as promoting future growth. Some of the many potential qualifying activities cultivators and dispensaries may conduct within their operations include:
- Experimentation to produce stronger, healthier, and better quality plants
- Testing new methods to increase crop yield maximum
- Developing original plant varieties
- Creating new or improved methods for harvesting and/or processing the plant
- Designing innovative uses for industrial hemp fibers
- Conceptualizing original hemp-related products
Even pioneering different growing strategies based on soil profiles, growth conditions, and overall regional climate may qualify for a research and development tax claim under new federal law and legislation.
How the R&D Tax Credit Works
Hemp business owners demonstrating evidence of an eligible operation may qualify for the R&D tax credit, which allows enterprises to recover a percentage of supply expenses, contract research expenditures, and any related employee wages. Additionally, startup organizations that don't show taxable income yet may opt to leverage the innovation tax credit as a payroll tax reduction to optimize cash flow opportunities throughout the organization.
Acena Consulting Helps Business Owners Navigate Updated R&D Tax Legislation
At Acena Consulting, we recognize that updates to federal and state legislation make it challenging to navigate through what qualifies for R&D tax credits. We can help. Contact us today to discuss your business operations with an onsite tax consultant.