Article
Five things to know about R&D tax credits for industrial hemp and CBD industries
May 27, 2020 · Authored by Craig Anderson, Liddy Steele
The Agriculture Improvement Act of 2018 — also known as the 2018 Farm Bill — federally legalized growing industrial hemp, as well as the sale, transport, or possession of hemp-derived and CBD products. This act not only opened the door for massive growth and innovation in the industrial hemp and CBD industries, but also created the opportunity for companies in these industries to claim eligible federal tax credits, including the R&D tax credit.
The R&D credit has the potential to offset taxable income, helping to reduce a company’s tax burden and increase cash flow. Many companies use these credit benefits to invest in other objectives — such as improving or expanding production, hiring or retaining employees, or developing the next line of innovative products and processes.
What is the R&D tax credit?
The R&D tax credit is available to a broad range of companies in the industrial hemp and CBD industries developing new or improved products or processes.
R&D credits apply directly to offset a company’s tax liability, with the potential to reduce tax liability to $0 for eligible small businesses. There’s no limit on the amount of qualified R&D expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely because the credit exceeds the company’s tax liability, any unused R&D tax credit can be carried forward for up to 20 years. In addition, previously filed tax returns can be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes.
Startup companies or small businesses in their first five years of gross receipts may also be eligible to apply the R&D credit to offset a portion of the company’s federal payroll tax liabilities, even if the company has minimal-to-no federal income tax liability.
The R&D credit is also available at the state level, with approximately 40 U.S. states offering an R&D credit to offset state tax liability.
How much can a company save with R&D tax credits?
The more a company spends on innovation and development, the more they can potentially recoup in credits. Some clients save a few thousand dollars each year, while others save millions.
The specific amount of credit a company can claim depends on several factors. Generally, the amount of federal credit equals 5%–10% of a company’s R&D expenses for that year, though in some cases the federal credit can be as high as 11%. A company’s total R&D credit benefit can also be much higher if they operate in states with applicable R&D credits as well.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.