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R&D Tax Credits for Hemp-Related Businesses

Research & Development Tax Credit for the Hemp Industry

The recent legalization of hemp and hemp-related products in more than half of the United States has caused lawmakers to reevaluate hemp production across our country. Once categorized as a controlled substance under Schedule I and II of the Controlled Substances Act, hemp, despite being a legal commodity under state law, was deemed illegal on a federal level. As a result, hemp manufacturers found themselves classified as illegal drug traffickers, and found their operations subjected to Internal Revenue Code Section 280E tax restrictions, a categorization that automatically disqualified growers from most federal and state tax incentives, including the research and development (R&D) tax credit program. In fact, being coded under Section 280E meant that the only deductions producers and distributors could subtract from their total taxable income was the cost of goods sold.

The 2018 U.S. Farm Bill Changed R&D Tax Credit Landscape for Hemp Growers

The recently passed 2018 U.S. Farm Bill completely changed the tax landscape for hemp-related businesses, removing this versatile plant and its diverse range of products (including hemp-derived CBD in specific quantities and applications) from the federal government’s list of DEA-monitored controlled substances. No longer an illegal material, hemp has officially earned its status within the U.S. Department of Agriculture.

Hemp’s New Classification Allows Growers to Leverage Innovation Tax Credit Benefits

The federal government’s recognition of hemp as a legal material officially allows growers, manufacturers, and distributors to tap into the many cash flow opportunities offered through the research and development tax credit. Explicitly created to drive innovation, stimulate job growth, and increase working capital, the R&D tax incentive can prove an invaluable resource for hemp enterprises across a diverse vertical swath as they prepare to launch and thrive in the global economy.

Like many other agronomic businesses, research and development play a crucial role in helping hemp growers develop and improve new and existing practices, many of which qualify as an eligible R&D activity.

Qualified Research Expenses (QREs) May Include:
  • Experimentation with new strains of plants
  • Experimentation with new fertilizer formulations
  • Design and development of new irrigation systems or techniques
  • Experimentation with new ways to manage pest control
  • Experimentation with hybridization or gene transfer
  • Design and development of new drainage systems
  • Experimentation with new ways to improve water utilization

Benefit Breakdown

Let’s say you spent the following costs in your development:

Labor: $500,000
Contractor: $150,000
Supplies: $100,000

Your Federal R&D tax credit would be: $60,000

Additional benefits may be available at the state level.

Acena, a specialist in the R&D law, bridges the gap between the qualified activities and the associated costs.

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R&D Tax Credit In Action

Client Testimonial

"Impressive and responsive service. Acena successfully steered our client through a state audit of their R&D tax credit. They bring strong technical knowledge backed up with a detailed report providing project-level information. Our client has better and more detailed documentation as a result of Acena's efforts and counsel."

- H.P., Tax Partner, Phoenix, AZ

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