“Separate Trade or Business” Companies: R&D Tax Credit
To qualify for the R&D tax credit, companies must diligently identify, quantify, and document their research activities and associated expenditures. This process involves a comprehensive examination of the company’s personnel and the projects undertaken. In the realm of cannabis-related enterprises, companies often invest considerable time and resources in research that would typically be eligible for the R&D tax credit in other industries. However, these companies are subject to restrictions imposed by IRC 280E.
In jurisdictions where cannabis products have been legalized at the state level, stringent regulations come into play. These regulations may include requirements for seed-to-sale tracking, video surveillance, security measures, and adherence to various other rules and regulations. Notably, certain cannabis-related products and services that do not involve direct interaction with the plant operate without these restrictions. Entrepreneurs in the cannabis industry frequently focus on creating innovative physical and digital platforms that connect customers with cannabis producers while operating within the industry’s restrictive framework.
For instance, companies offering “non-plant touching” services, such as those listed below, may not be subject to IRC 280E limitations. However, given the highly regulated and intricate nature of the cannabis industry, it is strongly advised that each taxpayer thoroughly investigates their specific circumstances and consults with professionals experienced in tax matters.
It is crucial to note that any taxpayers contemplating claiming U.S. federal and/or state tax incentives associated with cannabis products and/or services should seek comprehensive advice from tax accounting and legal experts before pursuing any tax benefit claims.
Software development companies operating in the cannabis industry have the potential to qualify for R&D tax credits by engaging in qualified research activities. The following activities are examples of those that may be eligible for R&D tax credits:
- Developing new and/or improved software applications for cannabis companies:
- Product ordering, tracking, sales, and delivery
- Enhancing processing speed, system reliability, and scale
- Designing new and/or improved software for dispensary mapping, product identification, and reviews:
- Inventory tracking/cataloging and search engine optimization for product orders
- Designing software to integrate social media platforms and connect supply chain partners and consumers in the cannabis industry
- Designing secure software systems and firewall protections to comply with regulatory requirements (e.g., HIPAA)
- Designing streamlined APIs for different cannabis industry business services and clients
- Developing cloud-based infrastructures and containerization for improved application reliability and architecture
- Developing data storage solutions for multi-purpose platforms and applications (e.g., mobile, desktop, wearable devices)
- Performing technical research on routing algorithms, cannabis ERP systems, and compliance requirements for platform optimization
- Conducting iterative experimentation to enhance system observability, application metrics, and monitoring
- Designing and developing video surveillance software and embedded hardware for product tracking and facility securityTesting application prototypes to optimize system design (e.g., speed, cost, redundancy)
- Experimenting with prototypes and system processes to develop server-side applications using coding languages (e.g., Golang, Python)
- Experimenting with back-end application services for delivery system ordering, inventory, and monitoring
- Developing FinTech software enhancements for regulatory compliance, asset monitoring, and enterprise resource management in the cannabis industry.
Laboratory Testing, Quality Assurance, and Regulatory Compliance companies that operate within the cannabis industry have the potential to qualify for R&D tax credits by engaging in qualified research activities.
These companies play a crucial role in ensuring the safety, quality, and compliance of cannabis products. By conducting research and development in their respective fields, they contribute to the advancement of testing methods, quality assurance protocols, and regulatory compliance within the industry. Examples of potentially eligible activity are further detailed below.
- Design new/improved experimental quality assurance protocols for efficient third-party testing and cost reduction.
- Develop new/improved quality measurement protocols exceeding ISO/IEC 17025 and company standards.
- Enhance potency testing methodologies (e.g., GC, HPLC).
- Improve product development protocols for efficient testing of raw materials, components, formulations, and finished products.
- Enhance technical laboratory testing processes for cannabinoid products, including SOPs, sample processing, solution preparation, extraction evaluations, data analysis, and tool sanitization.
- Conduct technical research to improve terpene profile analysis and residual solvent analysis protocols.
- Design new/improved heavy metals testing protocols using atomic spectrometry techniques.
- Develop testing methodologies to enhance shelf stability testing.
- Improve mycotoxin testing for employment screening and background verification.
- Develop new/improved experimentation and quality assurance methodologies (GLP, cGMP, HAACP, ISO).
- Enhance HPLC for better separation, identification, and quantification of components.
- Design compliant laboratory experimentation processes.
- Design protocols adhering to health, safety, and environmental regulations.
- Implement testing activities meeting GLP and cGMP standards.
- Develop hardware/software interfaces for efficient communication of testing results.
- Enhance potency testing activities for cultivation and manufacturing.
- Implement continuous improvement processes in the lab.
- Design processes for preventative maintenance of testing equipment.
- Design and validate new machinery for experimental purposes.
- Develop new procedures for heavy metal testing of fertilizers and soil.
- Design computer-based control and monitoring systems.
- Test prototypes to meet design specifications (e.g., speed, operation costs).
- Develop new laboratory hardware (e.g., analytical balances, syringes, micro-pipettes).
Mechanical/Industrial Engineering and Machinery & Equipment Development companies in the cannabis industry may qualify for R&D tax credits by conducting eligible research activities. Examples of such activities include the following
- Develop automated systems for indoor growth to enhance speed, quality, and accuracy.
- Design and develop smoking/vaping/dabbing technology for improved extraction and consumption.
- Design cultivation and processing machinery for enhanced production scale.
- Design computer-based control and monitoring systems.
- Experiment with prototypes and processes for filtration systems in air and water.
- Test prototypes to meet design specifications (e.g., speed, operation costs).
- Experiment with lighting, plant spacing, and variables to increase yield or production.
- Design manufacturing processes to improve efficiency during growing and harvesting.
- Perform technical research on LED lighting for indoor cultivation.
- Test new filtration systems for air and water.
- Develop machinery and software tools for strain identification.
- Develop irrigation/hydroponic systems.
- Evaluate hardware technologies for air purification, heating, and lighting.Integrate equipment processes for accurate potency readings of cannabis strains.
Contact KC&A today for your free R&D tax credit assessment and evaluation
