AndreTaxCo, PLLC

"Separate Trade or Business" Companies: R&D Tax Credit

 

The proper identification, quantification, and documentation for qualifying research activities and associated expenditures towards the R&D tax credit requires a thorough review of a company’s personnel and projects undertaken. Companies engaging in cannabis-related enterprises often expend time and resources on qualified research that, in most other industries, may be eligible to take advantage of the R&D tax credit, subject to IRC 280E restrictions. 

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In general, jurisdictions that have legalized cannabis products at the state level often require tracking from seed-to-sale, video surveillance and/or security, and operate under a long list of other rules and regulations. Often cannabis-related products and services that "don't touch the plant" operate without these restrictions. A popular cannabis-affiliated area for entrepreneurs is creating physical and digital ways to connect customers with cannabis producers within the restrictive framework of the industry.

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For example, the following types of companies providing "non-plant touching" services may not be subject to IRC 280E limitations as listed below. However, due to the highly regulated and complex nature of the cannabis industry, further investigation of the facts and circumstances application to each individual taxpayer is highly recommended through professional tax consultation.

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Software development companies working within the cannabis industry may be eligible for R&D tax credits for performing qualified research activities. For example, the following activities may be eligible for R&D tax credits as listed below.

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*Any taxpayers considering to claim any U.S. federal and/or state tax incentive associated with cannabis products and/or services should seek further professional tax accounting and legal consultation prior to making any tax benefit claim.

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• Developing new and/or improved software applications to be licensed to cannabis companies for product ordering, tracking, sales, and delivery through enhance processing speed, system reliability, scale, and other system parameters

• Designing new and/or improved software mapping of local dispensaries, product identification, and reviews for inventory tracking / cataloging and search engine optimization for product orders

• Designing new and/or improved software to integrate social media platforms and connect various supply chain partners and consumers within the cannabis industry

• Designing scalable, secure, and performance enhanced software security systems and firewall protections to protect customer information and/or pursuant to regulatory requirements (e.g. HIPAA patient health privacy laws)

• Designing streamline APIs to interface within different verticals regarding various cannabis industry business services and clients

• Developing new and/or enhanced cloud-based infrastructures and containerization to improve application reliability and architecture

• Developing new and/or improved data storage solutions for integrating across multi-purpose platforms and applications (e.g. mobile, desktop, tablet, wearable smart devices)

• Performing technical research into routing algorithms, cannabis ERP systems, and/or compliance requirements to optimize platform functionality

• Performing an iterative process of experimentation to enhance system observability and application metrics and monitoring

• Designing and developing new and/or improved video surveillance software (and/or embedded hardware) for video display, product tracking, and cannabis facility security

• Testing experimental application prototypes to evaluate and improve system design optimization (e.g. speed, operation costs, redundancy minimization)​

• Experimenting with new and/or improved prototypes and system processes to develop server-side applications within system specifications and requirements through various coding languages (e.g. Golang, Python)

• Experimenting new and/or enhanced back-end application services to fulfill evolving delivery system ordering, inventory, and monitoring

• Developing FinTech software enhancements to assist with regulatory compliance, asset monitoring, enterprise resource management, and other technology platforms to improve system collaboration between brands, retailers, and other stakeholders in the cannabis industry may also qualify as ancillary businesses 

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Laboratory Testing / Quality Assurance / Regulatory Compliance companies working within the cannabis industry may be eligible for R&D tax credits for performing qualified research activities. For example, the following activities may be eligible for R&D tax credits as listed below.

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*Any taxpayers considering to claim any U.S. federal and/or state tax incentive associated with cannabis products and/or services should seek further professional tax accounting and legal consultation prior to making any tax benefit claim.

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• Designing new and/or improved experimental quality assurance protocols to optimize third-party laboratory testing times and reduce costs

• Designing new and/or improved quality measurement protocols to adhere or exceed the standards set by ISO/IEC 17025 and company requirements

• Developing new and/or improved potency testing methodologies (e.g. Gas chromatography (GC), high-performance liquid chromatography (HPLC)) 

• Designing new and/or improved product development protocols to enhance inefficiencies in the testing processes for raw materials, components, formulations, and finished products.

• Developing new and/or improved technical laboratory testing processes of cannabinoid containing products including:

  • enhanced SOPs for testing evaluation and reporting

  • processing of laboratory test samples

  • experimental solution preparation

  • performing chemical extraction evaluations

  • experimental data analysis

  • sanitizing laboratory testing tools

• Performing technical research to develop new and/or improved terpene profile analysis testing to evaluate aromatic compounds, strain differentiation to maximize designed benefits

• Performing technical research to enhance residual solvent analysis protocols concerning byproducts from extraction processes (e.g. vacuum, heat, and winterization) to eliminate impurities and toxicity (e.g. Microbial Contamination Testing, Pesticide Testing)

• ​Designing new and/or improved heavy metals testing protocols including various forms of atomic spectrometry, atomic absorption (AA), inductively coupled plasma optical emission spectroscopy (ICP-OES), and inductively coupled plasma mass spectrometry (ICP-MS)

• Designing new and/or improved testing methodologies to enhance shelf stability testing (water activity and pH)

• Designing new and/or improved mycotoxin testing for employment screening and background verification  

• Developing new and/or improved experimentation and quality assurance methodologies including GLP, cGMP, HAACP, ISO, or in-house Quality Control Systems

• Developing new and/or improved high performance liquid chromatography (HPLC) to enhance the separation, identification, and quantification of testing components

• Designing new and/or improved laboratory experimentation processes, including compliant operating procedures

• Designing new and/or improved protocols to pursuant to all health, safety, and environmental regulations relative to assigned analytical work

• Designing new and/or improved testing activities to meet or exceed Good Laboratory Practices (GLP) or Current Good Manufacturing Practice (cGMP) standards pursuant to application FDA requirements and U.S. regulations

• Developing hardware and/or software interfaces to enhance communication of testing results and anticipated result receipt times

• Developing enhanced ancillary and potency testing activities to improve consistently, accuracy, and processing speeds of product cultivation and manufacturing

• Developing new and/or improved continuous improvement technical processes throughout the lab

• Designing new and/or improved system processes to coordinate preventative maintenance on laboratory testing and evaluation equipment

• Designing new and/or improved machinery and performing experimental validation analysis 

• Designing new experimentation procedures to improve the evaluation of heavy metal testing of fertilizers and soil (e.g. Cadmium (Cd), Arsenic (As), Lead (Pb) and Mercury (Hg))

• Designing new and/or improved computer-based control and monitoring systems (e.g. hardware, software) 

• Testing experimental prototypes and evaluation to meet design specifications or requirements (e.g. speed, operation costs)

• Developing new and/or improved laboratory hardware such as analytical balances, syringes, and micro-pipettes

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Mechanical / Industrial Engineering / Machinery & Equipment Development companies working within the cannabis industry may be eligible for R&D tax credits for performing qualified research activities. For example, the following activities may be eligible for R&D tax credits as listed below.

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*Any taxpayers considering to claim any U.S. federal and/or state tax incentive associated with cannabis products and/or services should seek further professional tax accounting and legal consultation prior to making any tax benefit claim.

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• Developing new and/or improved automated systems for indoor growth to enhance process speed, throughput, quality and accuracy, and other process parameters

• Designing and developing new and/or improved smoking/vaping/dabbing technology to enhance extraction and consumption by consumers 

• Designing new and/or improved cultivation and processing machinery to enhance production scale 

• Designing new and/or improved computer-based control and monitoring systems (e.g. hardware, software) 

• Experimenting new and/or improved prototypes and processes to develop new filtration systems for air and water 

• Testing experimental prototypes and evaluation to meet design specifications or requirements (e.g. speed, operation costs)

• Experimenting with lighting, plant spacing, and other variables to increase yield or production 

• Designing new and/or improved manufacturing processes to increase efficiency during growing and harvesting  

• Performing technical research of LED lighting to enhance growing indoors 

• Testing of new filtration systems for air and water 

• Develop new machinery and/or embedded software analytical tools for strand identification 

• Development of new and/or improved irrigation/hydroponic systems 

• Evaluating new or improved hardware technologies in air purification, heating or lighting 

• Integrating new and/or improved equipment processes to get more accurate readings of a cannabis strain’s potency