The Farm Bill

The Agricultural Improvement Act of 2018 (the Farm Bill) made cannabis-derived products such as industrial hemp and CBD (cannabidiol) legal at the federal level as long as it did not exceed 0.3% THC (tetrahydrocannabinol).  Cannabis products below the 0.3% THC level were no longer defined as  “marijuana.” 

This opened a window of opportunity for the cannabis industry as producers can qualify expenses related to legal cannabis businesses for the Research and Development (R&D) Tax Credits at both the Federal and State of California levels. 

Cannabis products with more than 0.3% THC are no legal and will not qualify for any tax credits or incentives under Internal Revenue Code Section 280E at the Federal level, but are eligible for R&D Tax Credits at the California level.

The following business verticals have claimed significant R&D tax credits:

  • Hemp Farmers / Growers
  • Cannabinoid Product Development
  • White Label Manufacturing
  • CBD Extraction Companies
  • Equipment Manufacturers
  • Hemp Farmers / Growers
  • Product Development
  • Seed-to-Sale Software
  • Sustainable Packaging
  • White Label Manufacturing
  • Cannabis / CBD Testing Labs
  • CBD Product Manufacturing
  • Genetics & IP Companies 

What Expenses Qualify?

Companies can claim qualified employee taxable wages, supplies & raw materials, computer rental costs (e.g. iCloud leasing costs – AWS), and domestic third-party contractor expenditures incurred throughout the R&D process.

Some examples of qualified expenses are listed below:

  • Taxable wages (typically from Form W-2, Box 1) paid to employees or contractors who are directly involved in the research, or those directly supervising or supporting those engaged in R&D activities;
  • Materials and Solvents utilized during processing and testing;
  • Raw materials and supplies consumed during cultivation;
  • Materials and Solvents utilized during processing and testing;
  • iCloud expenses used to develop and test software platforms to improve the growth or supply chain of a product. 

What Activities Qualify?

Several eligible businesses have not claimed the R&D Tax Credit due to uncertainty about the rules and qualifications. A business can be concentrated on any side of the industry (e.g. hemp, cultivation, retail, etc.) and likely be involved in qualified research activities.  Complex scientific experiments or research on innovative strains do not need to be done in order to have qualified research expenses.  The following are examples of qualifying activities in the Cannabis industry:

  • Development of new products;
  • Creating and implementing new or improved systems, equipment, and software (e.g. software to help manage supply chain scheduling or the growth schedules of products);
  • Exploring methods for successful indoor growing;
  • Cultivation of new legal characteristics and/or varieties;
  • Formulation of new procedures and growing methods (e.g. environmental, fertilizer or soil experimentation);
  • Experimentation to grow better quality plants;
  • Analyzing and creating new extraction methods and CBD oil products;
  • Development of new irrigation and filtration systems;
  • Increasing crop yield through newly developed farming methods;
  • Development of topical creams and other absorption techniques;
  • Exploring innovative ways to use industrial hemp fibers;
  • Developing new ways to store and improve shelf-life of products; 
  • Creating or improving ways to process and harvest plants 

How to Learn More

Dana R. Borys, An Accountancy Corporation is comprised of a team of experienced tax professionals well versed with the regulations within the cannabis industry.  Since an R&D Analysis can result in significant benefits, it should be properly substantiated.  Our team prepares a high-quality audit ready deliverable that meets IRS standards.  


Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with start-up/emerging growth companies and affluent individuals. Building connections beyond the code.