Regarding tax credits, a cannabis business faces federal obstacles because the federal government still prohibits all cannabis products, except for cannabidiol (CBD) with less than 0.30% THC, which the 2018 Farm Act federally legalized.
Research and development is one expenditure that most cannabis businesses share in common. And while the federal government limits many deductions for plant-touching businesses, some R&D costs can be submitted for the tax credit for cannabidiol products (hemp-derived). And save your business money.
If you are a business owner, you already know that the federal government allows for generous tax credits. There are opportunities to deduct reasonable business expenses from operating expenses (OE) and the cost of goods sold (COG). Depending on the kind of products you grow, manufacture or sell.
The cannabis industry is not as fortunate. Because although thirty-seven (37) states have legalized medical marijuana (and adult–use in some jurisdictions), the Internal Revenue Service (IRS) follows only federal regulations.
Even though your business operates with a state-issued license, many tax credits remain out of reach for dispensaries, cultivators, and any other plant-touching cannabis business. The tax rules set for the cannabis industry are in 26 U.S. Code § 280E – Expenditures in connection with the illegal sale of drugs.
Under IRS 280E, cannabis business owners may deduct the cost of goods sold (COGS). In 2021, the Internal Revenue Service also launched a new Cannabis/Marijuana Initiative program. The program was designed to make voluntary tax compliance easier for cannabis SMEs (small and medium enterprises)
California Governor Newsome signed Assembly Bill 37 into law, which removed the requirement for state cannabis businesses to conform to IRC Section 280E. It was exciting news for cannabis entrepreneurs living in the state of California.
But Assembly Bill 37 only applies to Personal Income Tax (PIT), which would allow cannabis business owners to benefit from standard tax credits and deductions as sole proprietors or entrepreneurs. It does not apply to incorporated businesses.
With no immediate changes to deductions for cannabis businesses on the horizon, there are still opportunities to use the cost of research and development activities for a tax break.
The Federal Research and Development (R&D) Tax Credit was enacted in 1981. It allowed businesses to claim up to 13% of spending costs for creating new products and services. And for innovating existing products and improving them.
There are four criteria used to determine whether the research activities qualify for the R&D tax credit:
The Research and Development Tax Credit was recently made available to licensed hemp businesses. And many business owners who are conducting R&D activities may not know they are qualified to apply for substantial tax credits.
If you are launching a startup company, you may also be able to apply for the Research and Development Tax Credit. Companies in the pre-revenue phase may offset up to $250,000 in payroll taxes within the first five years of operation. Startups can immediately benefit by accessing funds from research and development tax credits.
The Internal Revenue Service allows cannabis companies to claim research and development tax credits. But the criteria for applying those tax credits are different for research activities. And complex.
Some research and development (R&D) credits are not allowed. For example, the cost of salaried employee wages paid after June 30, 2021, and before January 1, 2022. If your business has applied for the Employee Retention Credit (ERC), those costs cannot be claimed for a second time for an R&D tax credit.
If you are a business owner investing heavily into R&D to grow your business or create new products or services, you may be eligible for a tax credit. Small businesses that are tax-exempt organizations (section 501) are not qualified for the Research and Development Tax Credit.
To meet the criteria of a small business for the R&D tax credit, the company must:
Cannabis business owners should also ask about research and development and start-up tax credits from state governments. When federal tax credits for cannabis businesses were allowed, many states followed to support local industries and job growth.
You are probably wondering what costs may be eligible for the R&D tax credit. Businesses can claim three types of expenses for the federal Research and Development Tax Credit.
When applying for the R&D tax credit, please note that businesses may not claim salaries used for the Employee Retention Credit (ERC). Visit our resource page to learn more about the ERC and how your business can apply for that tax credit.
There are different types of research and development activities that may qualify for a tax credit for your business. But many cultivators, processors, manufacturers, and retailers may be unaware of the type of R&D eligible for a tax credit.
If your cannabis or hemp business has engaged in the following activities, you may be eligible for the federal Research and Development Tax Credit. Some examples include (but are not limited to) the following R&D activities.
Applying for the federal Research and Development Tax Credit requires proof of the qualifying activities. And accurate reporting of the expenses to confirm eligibility. Our team at Accountabis Advisors serves cannabis business owners with expert advice. And we’ll help you explore your opportunity to claim valuable tax incentives.
Powered by Paybotic, America’s leading and most trusted fintech solutions provider, Accountabis Advisors helps cannabis businesses optimize savings and refunds. Are you qualified for research and development tax credits? Start by scheduling an appointment with one of our cannabis tax experts.