How to Make Use of R&D Tax Credit for the Cannabis Industry

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Cannabis legislation is working its way in many states, and some — including California — have made it legal to use, possess and share cannabis. Tax professionals need to know how recent legislation on the drug can affect a taxpayer’s return, such as for growers on how they can make use of research and development expenses as a tax credit.

What I did this summer was meet with an emerging company on the cannabis forefront in the Northern California area, whose thoughts on cannabis were completely different from any other cannabis business that I have run across. Most outsiders see legal cannabis, whether medicinal or recreational, as a few things. Some people are in it for the money that they think they are going to make; they see it as the new gold rush.

The reality is that states allow cannabis because the industry is taxed so heavily, by both the state and the municipality that these cannabis companies operate in, that they are willing to run afoul of federal law. While others see cannabis as a way for current users to either get high by making up pretend medical conditions to get their prescription. (Editor’s note: Read this article on the difference in using the words cannabis and marijuana.)

This company has an entirely different approach; they are going after the new license that California is offering, called a Micro-Business License, which allows the business to grow cannabis, transport the drug, and open a dispensary all with one license. For those of us in the accounting world, we can see that whoever controls all of these costs and taxes can also control the market with price.

This is important to the company’s Master Grower because he wants to devise different strains of the cannabis plant to find the best medicinal product to give to patients. (On a side note, Master cannabis growers have the education and experience necessary to successfully cultivate [and sometimes breed] large, resinous flowers that have few [if any] seeds. They know how to control every aspect of cannabis' life cycle, and they are knowledgeable about the best ways to deliver water, light, and nutrients according to the preferences of different cannabis strains.) They seek to deliver the medicine that these patients need at a price they can afford. Having worked intimately within the cannabis industry, I can appreciate this admirable approach.

The first step for this developing start-up was to evaluate the initial costs.

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About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice for almost 23 years. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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Nov 6th 2017 16:12

Is this a separate legal entity that would be able to deduct the expenses and receive the credit? Wouldn't any research and development be expense be non-deductible once the entity starts to traffic cannabis?

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Nov 6th 2017 23:50

Actually, there are some things to clear up here. First of all trafficking cannabis would be transporting the flower or any other part of the plant. The credit comes in as COGS. If you have a grower, and they are trying to make different strains of cannabis for different reason, all of the expenses that go into that is part of the R&D credit

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