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The R&D Tax Credit for Industrial Hemp

October 18, 2022

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Strike Summary

  • There are certain restrictions when taking advantage of both Sections 174 deduction/capitalization and Section 41, which can be seen in Section 280C.
  • Businesses that choose to elect Section 280C for their federal taxes could also lower their state taxes as well.
  • Taxpayers that want to use Section 280C must plan ahead because it can only be used on an originally filed return.
  • The recent passage of the Tax Cuts and Jobs Act may have have affected whether a taxpayer should use Section 280C in their tax strategy.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

Strike Summary

  • Entrepreneurs interested in the industrial hemp world can utilize the R&D tax credit just like innovators in related spaces.
  • Growers, testing laboratories, and manufacturers have opportunities to apply traditional R&D methods in the hemp industry, but they must comply with federal government standards.
  • Laboratories have had to increase their capacity by 600% to manage the increase in acreage under hemp cultivation in the last few years.

Potential in the Industrial Hemp Industry

The medicinal and recreational hemp and CBD industries have exploded over the last decade. Regulatory changes have allowed sales just in CBD products to increase over 830% from $173 million in 2015 to $1.615 billion in 2021. Estimated to reach over $40 billion by 2028, the hemp industry at large is rapidly evolving. 

This gives many industrial hemp companies operating in the space a great opportunity to claim the federal R&D tax credit. Companies often incur qualified business expenses under section 41 of the IRS tax code at many stages of the product development cycle. 

Let’s talk about the kinds of research and development that qualify for business tax credits in three stages of industrial hemp product development—growing, testing, and manufacturing—so that you can see the possibilities that exist for entrepreneurs in this industry.

Qualifications for Growers 

Businesses that are involved in growing activities have many different areas that can potentially qualify for the hemp tax credit. 

First, the development of new seeds and strains unique to the company or market can qualify for the tax credit before a plant is even grown. As growers experiment with seed production to find a strain that consistently yields hemp with less than 0.3% THC (in order to follow federal guidelines), they’ll also be looking for seeds that can grow the best hemp bedding, edible hemp seeds, or hemp oil. 

Colorado has recently approved 6 varieties of hemp seed, including Medicine Mother and Rajan. Just like corn growers have had to cultivate different kinds of seed to grow popcorn, field corn, sweet corn, and ethanol, industrial hemp farmers will need to find seeds best suited for different purposes. As growers experiment to find the perfect seed for hurd, hemp seed oil, or clothing production, new seed varieties will be discovered and patented. And these patents can help them qualify for tax credits.

Once an acceptable seed is settled upon to grow, the formulation and testing of new techniques or strategies for variable growing conditions will need to be addressed. Does one hemp varietal do better at higher elevation, or in a more arid climate? Does another variety flower more quickly with different fertilizer blends? Figuring out these kinds of details for the first time are considered novel to the firm, and the activities can apply towards the credit. 

Beyond botanical strategies, the creation and fabrication of new technology for hydration, lighting, temperature control, and so on potentially qualifies for the R&D credit in the growing process. Hemp-specific products, like this hemp fertilizer, open up a world of possibilities for agri-business entrepreneurs. Planting and harvesting hemp can be done by some older machines, or by makeshift alterations to existing farm equipment. But some growers are already seeing the benefits of investing in hemp-specific heavy machinery.

As growers fine-tune hemp production on an industrial scale, there are many ways that their activities and experimentations can qualify as R&D.

Qualifications for Testing Laboratories 

Industrial hemp cultivation differs from other mainstream crops because every year each field  must be tested by laboratories to ensure that the crop complies with federal guidelines. 

Analytical Cannabis says that, “The sampling method selected should be good enough to collect representative samples and must be sufficient to assure that no more than 1 percent of the plants in the harvest lot exceed 0.3 percent THC (dry weight) at a confidence level of 95 percent.” (emphasis added)

Fields that do not meet federal requirements are considered “hot hemp” and must be destroyed. Obviously, hemp testing laboratories play a pivotal role in guaranteeing that a crop can make it to the manufacturing stage.

By the end of 2018, there were 22,000 acres of hemp under cultivation. Within two short years, there were 146,000 acres. As a result, laboratories have had to increase their capacity by 600%.

Independent laboratories that provide testing and certification services for growers and retailers can potentially qualify for hemp tax credits as they create new processes and extraction methods. Third-party labs may need to develop new techniques or technologies to test properly and accurately. The process of developing these new means of testing provides a great opportunity to claim credits on R&D expenses. 

Qualifications for Manufacturers 

Patriotic American farmers grew hemp for rope in 1942, answering their government’s call for the war effort. After the war’s end, hemp cultivation ceased and advances in manufacturing ground to a halt. 

Much like growers and testers, hemp manufacturing is a wide open field ready for experimentation. Manufacturers that are ready to experiment with utilizing every part of the hemp plant can qualify for R&D tax credits as they create new products and try out innovative processes. Since hemp can be turned into anything from food, to paint, to pet bedding, manufacturers that set up new production facilities may qualify.

Consumer products may also require innovative packaging. For example, if the target customer is concerned about the environment, 100% green packaging may need to be developed. Child-resistant bottles may be required for some hemp products to comply with federal law. 

The creation of new products and methodologies to make products come to fruition in a retail store may be a great tax credit opportunity for manufacturers.

Ready to Claim Hemp Tax Credits?

Hemp Industry Daily reports that business has been booming and is expected to grow as more and more states explore easing legislative restrictions on both industrial hemp and CBD. 

Whether it be a grower, manufacturer, or retailer in the hemp and CBD industry, there are a myriad of activities and expenses that can qualify for the United States Federal R&D tax credit. Don’t let your industrial hemp business’s untapped potential go to waste! Strike can help you navigate the complicated world of the hemp tax credit. 

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

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