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Taxes and the Cannabis Industry

By February 20, 2020March 6th, 2024No Comments
Tax credits and the cannabis industry: Lab technician wearing face mask and lab coat, protective gloves, holding cannabis plant and CDB oil sample

Section 280E Changes Create R&D Credits Opportunity


Taxes and the cannabis industry: We have some great news regarding tax credit eligibility for businesses operating in the Hemp and CBD industries.

As a result of the 2018 Farm Bill being enacted on December 20, 2019, Hemp and CBD companies are no longer Section 280E restricted effective tax year 2019. This is significant for businesses developing new Hemp and CBD products. 

Previously, Section 280E of the Internal Revenue Code prohibited businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still classified as a Schedule I substance. 

Therefore Hemp and CBD companies were allowed no tax deductions or credits to reduce the burden of income taxes. However, Hemp and CBD no longer fall under these rules since they are not considered a Schedule I or II substance, making it federally legal and allowing for ordinary business expenses and tax credits. 

No Section 280E restrictions mean that Hemp and CBD businesses are now Federal and State Research Tax Credit Eligible


The R&D Tax Credit is an amazing tool to recoup cash paid to: 

  1. Employees developing new products, processes software, technology, inventions, patents, or formulas. 
  2. Supplies/materials consumed during the production and manufacturing phase. 
  3. Amounts paid to US-based contractors to develop those products/processes on the taxpayers behalf. 

Additionally, some Taxpayers can offset payroll taxes owed to the IRS with the Federal R&D Tax Credit. This is applicable to companies who are considered Qualified Small Businesses (QSB), meeting the following criteria: 

  • Less than 5 years of Gross Receipts 
  • Less than $5 Million in Gross Receipts 

Examples of activities that may now qualify for Federal and State Research Tax Credits:

  • Formulation of CBD Oil for pain relief 
  • Food or oil production 
  • Biofuel/bioplastics development 
  • Agricultural process optimization tests to maximize grow rate 
  • Fiber or textile processing 
  • Designing equipment for harvesting or processing Hemp crops 
  • Software/automation development 

Are you a taxpayer who is creating new or improved formulas, processes, software/technologies (automation)?  Are you a CPA working with clients in the Hemp/CBD industry? Contact DST Advisory Group for a no-charge assessment to find out how you can qualify for this opportunity. Please call us at 832-320-2200.


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