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R&D Tax Credits

What Does the Marijuana Opportunity Reinvestment and Expungement Act Mean for the R&D Tax Credit?

The Potential Impact of Decriminalizing Marijuana on the Cannabis Industry

On April 1, 2022, The House of Representatives passed legislation to decriminalize marijuana at the federal level.

Known as the Marijuana Opportunity Reinvestment and Expungement Act, it passed mainly along party lines at 220-204, with three Republicans voting in favor. It appears unlikely that the legislation will pass the Senate as currently constituted, as it would require 60 votes.

However, the legalization of Cannabis at the federal level has been a hot topic politically, and if passed its potential impact on tax issues will be significant. This is especially true for the Research and Development (“R&D”) tax credit.

Section 280E

Currently, following Internal Revenue Code Section 280E, the Cannabis industry has been unable to take deductions or credits related to the development, cultivation or selling of Cannabis.

Although it is legal in many states, it is barred at the federal level as the section declares: “No deduction or credit shall be allowed in running a business that consists of trafficking a controlled substance.” Cannabis is deemed a controlled substance, and therefore subject to Section 280E.

Even where legal, most states conform with Section 280E and thus Cannabis companies have not been able to claim deductions or credits at the state level as well.

Some states, such as California, have decoupled from Section 280E, allowing Cannabis companies to claim the state’s R&D tax credit. Other states have discussed the potential to decouple from this section as well.

Potential Impact

Should the federal government decriminalize marijuana, and delist the item as a controlled substance, Section 280E would no longer apply, and the Cannabis industry would be eligible to pursue R&D tax credits at the federal level.

If states conform with the federal treatment, or they simply decouple from Section 280E before decriminalization at the federal level, companies in this industry would also be able to pursue state R&D tax credits.

The Cannabis industry spends significant dollars in the development and production of its products, and if eligible would no question be able to capture some of these investments as qualified research and development expenses for purposes of the tax credit.

One thing is clear – the legalization issue is a hot topic nationally and especially in Washington, DC, and it would be wise for Cannabis companies to plan ahead should the law appear likely to change.