The passing of the 2018 Farm Bill was cause for celebration among hemp farmers and other hemp-based businesses. Formerly considered a controlled substance under section 280E of the federal tax code, the 2018 Farm Bill removed hemp and hemp-derived products (defined as cannabis containing less than 0.3% THC) from the controlled substances list. For tax purposes, this designation now allows these companies to claim federal and state tax benefits afforded to any other U.S. business.
Internal Revenue Code (IRC) section 280E prohibits any business that participates in the “trafficking” of a controlled substance from claiming federal and state tax deductions and credits. This statute was enacted in response to a convicted cocaine trafficker who claimed his right under federal tax law to deduct his business expenses, even for trading in an illicit product. To close this loophole, Congress passed section 280E in 1982 to prevent other drug dealers from following suit. Section 280E states that no deductions or credits are allowed in any amount “if such trade or business consists of trafficking in controlled substances."
Section 280E effectively prevented companies operating in the hemp/hemp-derived product spaces from claiming tax deductions and credits that other businesses are entitled to. As a result, these companies were subject to astronomically high tax rates and were deprived of valuable capital to reinvest in their workforce, infrastructure, and innovation.
The passing of the 2018 Farm Bill and removal of industrial hemp from the controlled substances list recognizes the many non-hallucinogenic uses of hemp and hemp-derived products. Hemp farming and its associated products have the potential to spawn entirely new industries, create jobs, and stimulate economies. And that’s just the beginning. This move translates to significant tax savings for these companies and has leveled the playing field for companies operating in this space.
The main outcome (with respect to taxes) of the 2018 Farm Bill is that hemp farmers, hemp CBD manufacturers, and other hemp-based companies can now claim tax deductions and credits beginning with the 2019 tax year. One of these credits is the Research and Development (R&D) Tax Credit. This is a dollar-for-dollar reduction in taxes owed after qualified research expenses (QREs) are calculated. Many companies are under the impression that they need to have a laboratory to claim these credits: this is not the case. Research activities are very broadly defined in the IRS codesting soil additives to enhance crop yield, developing new lighting arrays to improve grow conditions, or modifying packaging of a CBD oil to improve shelf lifethese all count as qualified research activities (QRAs) and QREs. As long as your company is performing a process of experimentation to determine the best way to achieve the desired outcome, those activities most likely qualify.
How much your company can save by claiming the R&D tax credit depends on a number of factors. In general, the more a company spends on innovation, the more it can claim in credits. Businesses can claim wages, supplies, and third-party contractor costs involved in the qualifying activity. For more information, see our FAQs. As tax laws are complicated no matter what business you are in, it’s best to enlist the help of professionals.
HempTax consultants have a successful track record of working with industrial hemp/CBD companies to claim R&D tax credits. Don’t leave money on the table. Contact HempTax today.
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