Ancillary companies in the marijuana industry could qualify for a federal R&D tax credit, and some states may reward marijuana growers with a state R&D tax credit.
R&D tax credits encourage companies to take innovative risks. That’s why there are research and development (R&D) tax credits for farmers, beauty companies, and more. The freedom to innovative can create some truly amazing products, but can individuals in the marijuana industry claim these tax credits too? Luckily, some companies in the marijuana industry may qualify for a federal R&D tax credit. Keep reading and discover if your company can take advantage of this incredible resource.
What are the Benefits of a Federal R&D Tax Credit?
Qualifying business owners receive 7-10% of their qualified research expenditures (QRE) as a federal R&D tax credit. The credit offsets a company’s social security portion of its payroll tax or the company income tax depending on certain circumstances. Unfortunately, due to section 280E of the U.S. tax code, no business that takes part in “plant-touching” can claim an R&D tax credit like their other agricultural counterparts.
280E Explained
While marijuana has been decriminalized in several states, the federal government still lists it as a Schedule I drug. This means even a legally operating “plant-touching” cannabis business located in a state that has decriminalized marijuana is still considered a “drug dealer” by the federal government.
Section 280E states that traffickers of Schedule I or II drugs aren’t allowed to make certain deductions like below-the-line deductions. In addition, no marijuana growers can access a federal tax credit. Now, according to the IRS, if you grow marijuana you can deduct the cost of your goods sold despite being barred from getting a credit. Thankfully, if you live in a state that has legalized marijuana you still may be able to access a state R&D tax credit.
Which States Have Legalized Marijuana?
Below, you can see the states that have fully legalized marijuana for medicinal and recreational purposes:
- Alaska
- Arizona
- California
- Colorado
- Illinois
- Maine
- Massachusetts
- Michigan
- Missouri
- Montana
- Nevada
- New Jersey
- New Mexico
- New York
- Oregon
- Rhode Island
- Vermont
- Virginia
- Washington
Remember, when you apply for a state R&D tax credit, you receive what’s essentially found money. If you think you might be eligible, it’s in your best interest to utilize this resource. You can clarify if your business could qualify for a state R&D tax credit by contacting your state’s department of revenue.
Can Marijuana-Related Businesses Apply for a Federal R&D Tax Credit?
Yes, as long as your company doesn’t participate in any cannabis plant-touching, you can apply for a federal R&D tax credit. For example, if your company designs and builds grow lights for marijuana producers, you could qualify for a credit. Qualifying for a federal R&D tax credit could make you eligible for a state R&D tax credit too. If you want to learn how to get a state R&D tax credit, contact us at Bowers R&D today.
Can CBD and Hemp Companies Apply for a Federal R&D Tax Credit?
Per the 2018 Farm Bill, the production of CBD products and industrial hemp (C. sativa) is legal in the eyes of the federal government. Hemp growers, like other farmers, can now apply for federal and state R&D tax credits. Companies developing CBD products that are derived from C. sativa can also freely apply for a tax credit.
Marijuana and R&D Tax Credits: What You Need to Know
Until the federal government removes marijuana as a Schedule I drug, no cannabis plant-touching business can apply for a tax credit. Although, these companies are allowed to deduct the cost of goods sold and could be eligible for state R&D credits in certain states. Companies related to the marijuana industry, like grow light manufacturers, can apply for a federal R&D tax credit. Industrial hemp farmers are also eligible for R&D tax credits at the federal and state level.
If you have questions about marijuana and R&D tax credits, call Bowers R&D at 610-368-5877 today.