Posted by Jeffrey Feingold on 01.14.20
Illinois became the 11th state in the nation to legalize recreational marijuana use in June 2019 after Democratic Gov. J.B. Pritzker signed a bill into law, permitting Illinois residents and visitors to buy the drug from licensed dispensaries, beginning on January 1, 2020. The Illinois law allows people 21 or older to possess up to 30 grams (1.06 ounces) of cannabis flower and up to 5 grams (0.17 ounces) of cannabis concentrate. The law will also allow for people with low-level marijuana convictions to have their records scrapped, an increasingly common provision in marijuana bills aimed at helping those hit hardest by the war on drugs. Cannabis sales could generate $250 million for Illinois by 2022, according to estimates by state officials.
Each of the states that have legalized marijuana businesses have their own unique set of rules, restrictions and regulations. It’s important for any cannabusiness to know the laws of their state.
Here’s a quick breakdown for the new laws of Illinois’ recreational marijuana use:
Advances in cannabis-derived research and development paired with the consumer demand will only further an already active wave of changing opinions about cannabis in America. Products currently being offered include a variety of strains and extracts such as oils, tinctures, resins and consumables. As a result of the legalization in certain states, new businesses in this industry are seeking the services of CPAs to help guide them through the tax laws and state regulations. Cannabis, is classified as a Schedule 1 controlled substance under the federal Controlled Substances Act of 1970 and is subject to federal prosecution. Historically, the majority of cannabis is sold through illicit channels. To control this illegal market, state governments have started legalizing cannabis as a way to monitor the products that enter the supply chain and reap benefits through taxes collected on these products. As the cannabis industry has expanded rapidly with legalization, tax implications have become important considerations. With careful planning and the understanding of applicable state tax codes, cannabis entrepreneurs can take proactive steps to reduce their state tax liabilities.
Cannabis-related businesses conducting research and development activities may qualify for and benefit from R&D tax credits. Potentially eligible costs for state R&D tax credits include wages, cost of supplies, and cost of testing and contract research expenses. As the majority of state R&D tax credits align with the federal R&D tax credit requirements, the activities and associated expenditures of a company can often qualify for state R&D tax credit if the activities meet the same four-part test required for claiming any a Federal R&D tax credit:
Cannabis-related Businesses and the R&D Tax Credit
The proper identification, quantification, and documentation for qualifying research activities and associated expenditures towards the R&D tax credit requires a thorough review of a company’s personnel and projects undertaken. Companies engaging in cannabis-related enterprises often expend time and resources on qualified research that enable taking advantage of the R&D tax credit.
Some examples of cannabis-related business activities that may qualify for R&D tax credits include:
Internal Revenue Code 280E
One other issue to note is that, at the federal level, Section 280E of the Internal Revenue Code was passed in 1982 to specifically prohibit the deduction of otherwise ordinary and necessary business expenses from the gross income associated with the trafficking of Schedule I or II controlled substances within the meaning of the Controlled Substances Act. This leaves “plant-touching” cannabis-related businesses unable to deduct non-cost of goods sold business expenses for federal taxes, as marijuana is still considered a Schedule I substance. This burdensome treatment at the federal level must continue to be complied with for federal taxes until a change in federal law in regards to the controlled substances status of marijuana.
Tax Point Advisors provides R&D tax credit services and other specialty tax services to businesses in the cannabis industry and can help you navigate any issues and opportunities arising from this new Illinois legalization for 2020. The current opportunity for exploration of R&D tax credits by cannabis-related businesses is at the state level. To learn more about R&D tax credits from the experts at Tax Point Advisors, please call us at (800) 260-4138.