R&D Tax Credits & The Cannabis Industry – What’s what?

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Expert Opinion
December 3, 2021

Over the past decade, numerous states have passed legislation to permit the use of recreational cannabis. In fact, since the passing of the first legislative action permitting recreational cannabis use in 2012, 16 additional states have followed suit. Such a legislative trend is likely to continue as states continue to view tax revenue generated from cannabis sales as an increasingly attractive method to boost budgets.  

Unsurprisingly, the legalization of recreational cannabis has sparked an industry that very much remains in its infancy; and like any newly minted industry, rampant innovation is necessitated by an evolving marketplace. However, while the presence of a new and innovative marketplace regularly invites significant investment, recreational cannabis contains nuances unlike other industries. More specifically, the use of cannabis is currently deemed a schedule I substance to the Controlled Substances Act and is therefore illegal under United States Federal jurisdiction. As a result, this legal classification invites difficulty related to interstate commerce, banking services, and the ability to take advantage of both business tax deductions and tax credits. In other words, despite a company being licensed to conduct such business in its respective state, the same company is treated dissimilarly at a federal level due to the nature of the company’s business.  

Despite the legal complexities associated with recreational cannabis at a federal level, the industry continues to evolve and innovate. Moreover, the vertically integrated nature of the industry has proved lucrative for industries not traditionally viewed as being associated with recreational cannabis.  

When one considers the daily operation of a recreational cannabis company, one must think beyond the end-product itself. For example, consider architects designing facilities uniquely tailored to cannabis-specific operations. Moreover, consider the design of unique machinery and related automation capabilities to accommodate cannabis-specific processing methods. While these two brief examples are only a glimpse of industries vertically integrated with that of recreational cannabis, it is undeniable there is a significant presence of innovative and iterative development efforts.  

Fortunately, these types of innovative efforts are regularly rewarded under §41 of the Internal Revenue Code (“R&D Tax Credit”). With companies regularly dedicating significant time and resources to execute complex and customized designs, products, and processes for the recreational cannabis industry, the R&D tax credit can go to work for you and help you recoup a portion of the time allocated and dollars expensed. As such, if your company designs, develops, or implements supporting services for the recreational cannabis industry, you are not excluded from federal tax incentives—and perhaps more significantly, it is likely your innovative efforts are precisely the type of activity the R&D Tax Credit rewards.  

While the recreational cannabis industry remains nuanced at a federal level, Ayming USA is home to numerous tax professionals capable of navigating your specific facts and circumstances. 

Learn about maximizing your incentives from the cannabis industry

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