Hemp Production Rising with Farm Bill, Possible R&D Credits

Christopher T. Marrie, CPA, CCIFP and Principal in the Naples, Florida office of HBK CPAs & Associates is also the southern tier region leader of the firm's Cannabis Industry Group. He performed a technical review of this article, which was written by Sally Frizzell Coleman, CPA, PA. Sally is a Senior Director in HBK’s Fort Myers, Florida office and has been with the firm since she merged with HBK in 2017. She is a member of the firm's Cannabis Industry Group. With the passage of the Agriculture Improvement Act of 2018 (U.S. Farm Bill), farmers can now legally grow industrial hemp throughout the United States. Holly Bell, Director of Cannabis for the Florida Department of Agriculture and Consumer Services, spoke of the more than 25,000 uses for hemp. “The CBD craze is what the plant is used for and what will get this industry going,” she said. Adding that hemp will remain a valuable commodity and is not a fad. Industrial hemp affects multiple industries which include agriculture, manufacturing, energy, medical, nutrition and technology. With the passing of the U.S. Farm Bill, researching can be performed to develop ways in which to use this versatile plant for both profits and the sustainability of our planet. Research and development will be instrumental in exploring many of the ways in which to process and use the hemp plant. Entrepreneurs may be able to benefit from Federal Research and Experimentation (R&D) Tax Credit to help reduce their Federal income tax burden.1 Potentially eligible expenses include wages, the cost of testing, supplies, as well as contract research expenses. Some examples of business activities that may qualify for R&D tax credits include but are not limited to:
  • Experimenting with fertilizers, plant spacing, lighting, watering techniques, etc. to increase yield or production
  • Improving efficiency in production techniques during growing and/or harvesting
  • Developing new strains of hemp
  • Developing automated systems for greenhouse production
  • Developing new edible products with CBD derived from hemp
  • Experimenting with topical creams and skin absorption formulations
  • Testing new CBD oil products and extraction techniques
  • Testing of new filtration systems for air and water
  • Developing new software analytical tools
  • Developing new irrigation/hydroponic systems
  • Testing new equipment to shorten the life of a growth cycle
  • Studying hemp uses for energy fuels, textiles and other materials
The four-part test required for claiming any Federal R&D tax credit is as follows:  
  • Qualified Purpose
    1. - The purpose of the research must be to create a new or improved product, process, or formulation, resulting in increased performance, function, reliability or quality.
    1. Technological in Nature – The research must rely on principles of the hard sciences, such as engineering, physics, chemistry, biology or computer science.
    1. Elimination of Uncertainty – Activities must overcome some unknowns, such as uncertainty as to capability, optimal design, or optimal methodology.
  1. Process of Experimentation – Experimentation can be demonstrated through test batches, simulations, systematic trial and error, or other methods of evaluating alternatives to achieve a desired result.
The possibilities of processes involving hemp eligible for the Federal R&D Tax Credit seem endless. Please contact Christopher Marrie, CPA, CCIFP and Director of the firm's Cannabis Industry Group in the southern tier service region, at CMarrie@hbkcpa.com for more information.   -------------------- 1 Some states also offer similar credits.

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About the Author(s)

Christopher Marrie, CPA, CCIFP is a Principal in the Naples, Florida office of HBK CPAs & Consultants and has been with the firm since 1998. He is also Director of the firm's Cannabis Industry Group in the southern tier of the firm's service region. Chris has been instrumental in the growth of HBK’s Cannabis Niche. He has worked extensively with clients in all facets of the cannabis industry.

Sally Frizzell Coleman, CPA, PA is a Senior Director in HBK’s Fort Myers, Florida office and has been with the firm since she merged with HBK in 2017. She specializes in all areas of tax: tax preparation, planning and consulting, and has worked for a wide range of industries, including construction, real estate, medical, retail, tourism, fitness, and nonprofit, as well as for high net worth individuals. Sally is a Certified Family and County Mediator for the State of Florida. She also holds her Professional Certification in Cannabis Production from Florida Gulf Coast University.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.