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:

• Consumers aged 21 and older can buy marijuana products from licensed sellers in Illinois with or without a medical marijuana card.
• The only legal places to purchase Cannabis are licensed medical marijuana dispensaries.
• Illinois will begin granting additional licenses to dozens of new stores, processors, cultivators and transporters by Mid 2020.
• People 21 or older to possess of up to 30 grams (1.06 ounces) of cannabis flower.
• The legal limit for cannabis concentrate is 5 grams.
• The legal limit for cannabis-infused products, such as edibles or tinctures, is 500 milligrams of THC, the chemical that gets users high.
• Marijuana is prohibited to use in any public place, such as streets or parks, in any motor vehicle, on school grounds, with the exception of medical users, near someone under the age of 21, or near an on-duty school bus driver, police officer, firefighter or corrections officer.
• Any person, business or landlord can prohibit use on private property.
• Illinois colleges and universities are also allowed to ban 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: 

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 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. 

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: 

• Experimenting with lighting, fertilizers, plant spacing, and other variables to increase yield or production 
•  Improving efficiency during growing and harvesting 
• Developing new strains of cannabis via genetic and cross breeding techniques 
• Exploring the use of LED lighting in growing indoors 
• Developing automated systems for indoor growth 
• Developing new concentrates 
• More research into hybrid strains for medical use 
• Cultivation techniques 
• New and improved edible creations 
• Topical creams and skin absorption techniques 
• New oil products and extraction techniques 
• New Smoking/vaping/dabbing technology 
• Developing new ways to prevent mold or plant loss 
• Testing of new filtration systems for air and water 
• Developing improved technologies for delivery of cannabis-derived substances 
• Develop new software analytical tools for strand identification 
• Discovery of new medical treatment methods 
• Development of 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 cannabis uses for biofuels, textiles and other materials 
• Implementing new or improved processes to get more accurate readings of a cannabis strain’s potency and related indicators, such as levels of THC and CBD 

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. 

Blog regarding the extension to Illinois R&D State Tax Credits

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.