“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:

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.

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

Contact KC&A today for your free R&D tax credit assessment and evaluation