What Rescheduling Marijuana Means for R&D Tax Credit
We recently posted a blog on the FAQ’s around HHS’s letter to the DEA recommending rescheduling marijuana to Schedule III. In that blog, we explained that the biggest impact of rescheduling is that Section 280E would no longer apply to state-authorized marijuana companies. Most people think of Section 280E only in the context of deductions. However, removing the application of Section 280E also opens the door for state-authorized marijuana companies to use the R&D Tax Credit, which could provide a significant reduction in tax liability and foster innovation within marijuana industry.
The R&D Tax Credit
The R&D Tax Credit is a government incentive to reward companies for investing in innovation within the United States. It has proven to be a key financial tool to foster economic growth and technological advancements. The IRS has specific criteria for a company to be eligible for the R&D Tax Credit. These activities should be technological in nature and must be part of a process of experimentation aimed at creating new or improved functionality, performance, reliability, or quality. This may include research or experimentation around marijuana production, marijuana formulation, marijuana strain development, and several other activities.
The Barrier to R&D Tax Credit for Marijuana Companies – Section 280E
Section 280E prohibits businesses engaged in the trafficking of controlled substances (i.e., state-authorized marijuana companies), as defined by Schedule I and II of the Controlled Substances Act, from deducting any expenses related to their trade or business. While many state-authorized marijuana companies have expenses that would qualify for the R&D Tax Credit, Section 280E prohibits these companies from taking the R&D Tax Credit since marijuana is currently classified as Schedule I. The result is that state-authorized marijuana companies are not incentivized to invest in research and development, which has hindered the growth of the marijuana industry.
The Implication of Rescheduling Marijuana to Schedule III
Recently, HHS sent a letter to the DEA recommending marijuana to be rescheduled to Schedule III; and most industry experts expect the DEA to follow this recommendation some time in 2024. The key implication of rescheduling marijuana to Schedule III is that Section 280E would no longer apply to state-authorized marijuana companies and, thus, the R&D Tax Credit would be available to state-authorized marijuana companies. This shift should foster innovation and growth within the marijuana industry.
Claiming the R&D Tax Credit
Claiming the R&D Tax Credit involves various complicated steps, including, but not limited to, determining eligibility, identifying Qualified Research Activities with extensive documentation, choosing a calculation method, completing the relevant tax forms, maintaining detailed records, considering state tax credits, and filing of your tax return. Due to the complexities and detailed documentation required for the R&D Tax Credit, it would behoove marijuana companies to start working with professionals now in anticipation of the rescheduling. The founder of Mr. Cannabis Law is a CPA and has significant experience maximizing the benefits of the R&D Tax Credit. If you are interested in learning more about how you can start preparing for the R&D Tax Credit, please contact us today to speak to one of our attorneys.
Date: 1/23/2024
