Cannabis businesses involved in research and development activities and related expenses may be eligible for valuable R&D tax credits. Over the past several years, some states including California, have introduced and passed legislation making it legal to grow, manufacture, and use both medicinal and recreational cannabis (also known as marijuana). Frequently, the cultivation of the cannabis plant and the subsequent development of new and different marijuana products involve much research and experimentation. These businesses and their tax professionals need to know how the new legislation coupled with the current state R&D tax credit rules can provide significant savings on the taxpayer’s income tax returns.Background: Under federal law, cannabis is still an illegal controlled substance and while businesses must report all sources of income from both legal and illegal enterprises, the ability to recognize all business expenses as a deduction are limited to the cost of goods sold (COGS) of growing the plant (but not the production, distribution, or sale of cannabis products). In addition, under IRC Sec. 280E, no credit (including federal R&D tax credits) shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business consists of trafficking in controlled substances. So, while there may be no federal opportunity to claim R&D tax credits, what about cannabis companies working in the state of California?
In general, the California Revenue and Taxation Code (R&TC) conforms with the federal R&D tax credit rules regarding credit eligibility, however the ability of cannabis businesses to claim these credits is much different. On June 27th, 2017, Senate Bill 94, The Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), passed and partially repealed the previous law and established a new regulatory framework for cannabis businesses in California; with the law taking effect on January 1st, 2018, effectively legalizing the growing, manufacturing, selling, and use of marijuana (with limitations).
Furthermore, according to the California Franchise Tax Board (FTB) under this new framework, cannabis businesses “may receive business tax credits so long as they meet the specific requirements for the particular credit.” This is great news and relief for California cannabis businesses who perform research and development activities when growing and creating products within the state of California. Some areas of opportunity for cannabis companies include the following:
- Cultivation techniques
- Developing concentrates
- Research into hybrid cannabis strains
- Creating edibles
- Process and manufacturing Improvements
- Topical creams/skin absorption techniques
- New oil products and extraction methods
- Smoking/vaping/dabbing technology
For more information on tax incentive programs available in your area, find your state below.