Thanks to the U.S Farm Bill, the Industrial Hemp Industry Can Now Claim The R&D Tax Credit

Thanks to the U.S Farm Bill, the Industrial Hemp Industry Can Now Claim The R&D Tax Credit

Posted by on 10.11.19

For the first time since 1937, farmers will be allowed to legally grow industrial hemp throughout the United States thanks to the passing of the U.S. Farm Bill in 2018. Hemp is a versatile plant with thousands of applications across multiple industries. From textiles, manufacturing and nutritional applications, to new fuel uses, the possibilities are still continuously growing as we learn more about the crop.

In 2014, the Agricultural Act of 2014 (also known as the 2014 U.S. Farm Bill) included language that created a framework for the legal cultivation of cannabis plants containing no more than 0.3% of tetrahydrocannabinol (THC). As THC is the principal psychoactive constituent of the cannabis plant, these low THC plants were considered to be “hemp” and allowed to be cultivated under state hemp research pilot programs that followed requirements imposed by state departments of agriculture. The passage of the Hemp Farming Act of 2018 (a main part of the 2018 U.S. Farm Bill) removed hemp from the federally illegal controlled substances list. In addition to allowing farmers and cultivators to grow industrial hemp and allowing processors to produce hemp-based products, the Hemp Farming Act allowed companies operating in the industrial hemp industry to claim the federal Research and Development tax credit for legal hemp.

From a business tax standpoint, this change in federal classification of hemp is cause for celebration throughout the entire hemp industry. Industrial hemp affects not only the agricultural industry, but also touches the medical, manufacturing, energy, nutrition and tech industries as well. With this legalization and a recognition of the virtually infinite number of uses, the 2018 U.S. Farm Bill represents a great opportunity for American agricultural markets. With the passing of this bill, industries across the U.S will begin utilizing and now researching ways to profit with this amazing plant. Industrial hemp has traditionally been divided into three main categories: fiber, grain and high-cannabinoid producers (CBD). With expanded research, industries will soon be adding other categories to that list in the near future. 

The R&D Tax Credit and Hemp

Research and development is a critically important aspect of the hemp industry’s current and future growth. Hemp related businesses conducting research and development activities may qualify for and benefit from R&D tax credits. Potentially eligible costs for the 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 as well if the activities meet the same four-part test required for claiming any a Federal R&D tax credit: 

  1. Qualified Purpose - The purpose of the research must be to create a new or improved product, process, or formulation, resulting in increased performance, function, reliability or quality. 
  2. Technological in Nature – The research must rely on principles of the hard sciences, such as engineering, physics, chemistry, biology or computer science. 
  3. Elimination of Uncertainty – Activities must overcome some unknowns, such as uncertainty as to capability, optimal design, or optimal methodology. 
  4. Process of Experimentation – Experimentation can be demonstrated through test batches, simulations, systematic trial and error, or other methods of evaluating alternatives to achieve a desired result. 

Some examples of hemp related business activities that may qualify for R&D tax credits include: 

  • Experimenting with fertilizers, plant spacing, and other variables to increase yield or production 
  • Improving efficiency during growing and harvesting 
  • Developing new strains of hemp via genetic and cross breeding techniques 
  • Exploring the use of LED lighting for indoor growth
  • Developing automated systems for indoor growth 
  • Developing new and improved edible creations with CBD derived from hemp
  • Experimenting with topical creams and skin absorption formulations 
  • Testing new CBD oil products and extraction techniques
  • Testing of new filtration systems for air and water 
  • Developing new software analytical tools for strand identification 
  • Developing new irrigation/hydroponic systems 
  • Testing new equipment to improve or speed up a harvest cycle 
  • Evaluating new or improved technologies in air purification, heating or lighting 
  • Studying hemp uses for biofuels, textiles and other materials 
  • Implementing new or improved processes to get more accurate readings of the hemp plant strain’s potency and related indicators, such as levels of THC and CBD 

Businesses across the hemp industry can now begin to explore the tax benefits their state may offer as well as getting to know how the R&D tax credit can benefit them come federal tax season. With the help of their CPAs and Tax Point Advisors’ expertise, hemp businesses across the U.S. have substantial support available to manage and lessen their income tax liabilities.

Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and their clients throughout the United States. To learn more about R&D tax credits from the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.

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