2018 Farm Bill Provides Framework for Hemp Industry to Claim R&D Tax Credit

Cannabis companies have traditionally been unable to claim R&D credits due to 26 U.S. Code § 280E, which prohibits any business engaged in trafficking Schedule I or II substances from claiming any federal tax deductions or credits. However, with passage of the Agriculture Improvement Act of 2018 (2018 Farm Bill), hemp is no longer considered a controlled substance as of Jan. 1, 2019.  Hemp is defined as the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers with no more than a 0.3% concentration of THC on a dry weight basis. Cannabis with more than 0.3% THC concentration, including marijuana, is still considered a controlled substance under federal law, and companies that cultivate or distribute these substances are still subject to 280E.

In addition to the 2018 Farm Bill, the U.S. Department of Agriculture has outlined regulations to approve submitted plans from states, territories and Indian tribes for the domestic production of hemp. It also establishes a federal plan for states and tribes that elect not to submit a plan. It is important to note the Food and Drug Administration still has the discretion to put regulations in place over the cannabis industry regarding food, drugs and cosmetics, including CBD products.

With research and development being critical to the continued growth of the cannabis industry, companies conducting research and development related to the cultivation, production or distribution of hemp could potentially benefit from state and federal R&D credits for expenses incurred in 2019 and moving forward. Because regulations and laws are continuously evolving in regard to the cannabis industry, companies should begin to put systems in place to prepare to claim the research and development credits once final regulations are established.

Over the coming months, McGuire Sponsel will work to provide our clients with more information on USDA developments, including its approval of state and tribal plans as well as any new FDA guidelines.  In addition, we can help evaluate whether a cannabis business may be eligible to claim R&D credit.