Editor: Marcy Lantz, CPA
The cannabis plant has two varieties — marijuana (an intoxicant) and hemp (a nonintoxicant). In appearance, the two plants are virtually indistinguishable.
As far back as Colonial times, hemp was an important crop in the United States, where it was cultivated for fiber and textile products. Then, in the 1930s, hemp was lumped into the same category with marijuana and was made illegal. All this changed last year with the Agricultural Improvement Act of 2018, P.L. 115-334, commonly referred to as the 2018 Farm Bill, which removed industrial hemp from the Controlled Substances Act's list of controlled substances and made it a lawful agricultural commodity. The end to hemp prohibition opens new business opportunities for clients in the industrial hemp industry, making it important that CPAs have a working knowledge of industrial hemp.
What hemp does not do: The mind-altering drug known as marijuana typically has a THC content of 10%-30%, while industrial hemp contains no more than 0.3% THC, which means it has no psychotropic effects and therefore cannot be used as a recreational drug.
What hemp does do: Hemp is grown as an industrial crop and is naturally abundant in the compound CBD. Hemp can be bred for making textiles such as clothing and fiber, for building materials, and for use in automobile manufacturing, as well as for health and wellness and beauty products.
Although hemp has virtually no mind-altering drug content, its history of being on the Controlled Substances Act list has led many people to mistakenly assume it is a drug and, therefore, that this potentially lucrative business is related to the drug trade.
It is clear that states see hemp as an opportunity to stimulate their economies, as at least 44 states have now enacted laws allowing the cultivation of hemp for commercial, research, or pilot programs. Each state's laws regulate the production, testing, research, manufacturing, and transport of hemp, hemp extracts, and hemp finished products within its borders.
There are two major categories of hemp: (1) industrial hemp used in the production of industrial products such as rope, building materials, and textiles; and (2) phytocannabinoid-rich hemp grown for the production of CBD to be used in health and wellness and beauty products. Goods containing CBD have become wildly popular, and it is found in lotions, makeup, energy drinks, shampoo, creams, and balm.
The reclassification of hemp into the nondrug category also results in an important change in the tax position of these business activities. Sec. 280E denies businesses in the drug trade from claiming deductions for business-related expenses if the business "consists of the trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."
Because hemp cultivation and its related products are no longer considered controlled substances under federal law, producers and sellers are no longer subject to Sec. 280E as long as hemp is not considered a controlled substance under a relevant state law. As a result, these businesses are now free to take advantage of the same tax breaks as more traditional commercial enterprises, including tax deductions for all overhead and general and administrative costs, and may be eligible for federal tax credits including the research and development credit.
A real challenge for those in the hemp business is uncertainty about its status that persists in the banking industry. Although states have been quick to create policies and laws regulating hemp cultivation and production, the banking industry still lacks clear, written rules for regulatory examiners to follow. As of this writing, hemp businesses face difficulty in financing their operations and securing bank services, and banks are waiting for more clarification on how they can provide services to hemp companies.
New Frontier Data, an authority in analytics and business intelligence in the cannabis industry, reported that the hemp industry generated $1 billion in revenues in the United States in 2018 and predicts this figure will more than double to $2.6 billion by 2022. This industry growth is expected to create the need for accountants, lawyers, compliance officers, government regulators, IT specialists, financial and insurance experts, transporters, researchers and lab technicians, marketers, and many other professionals.
Types of businesses impacted by the industrial hemp industry include farming, extraction, transportation, warehousing, processing, manufacturing, distribution, financing, and wholesale and retail sales. CPAs have an opportunity to play an important role in this growing business sector as many of their clients consider how they might benefit from the hemp industry.
Practitioners who have clients involved in the hemp industry should be aware of several common industry terms, which include the following:
- Breeder: Conducts research to develop new hemp varieties and is licensed at the state level.
- Cannabis: A plant family that includes many species or varieties, including both hemp and marijuana.
- CBD: The nonpsychoactive compound cannabidiol.
- Hemp: The plant Cannabis sativa with a THC concentration of not more than 0.3% on a dry weight basis.
- Harvest certificate: A license issued at the state level that is required for transportation of hemp.
- Hemp handler: A person who receives industrial hemp for processing into commodities, products, or seed.
- Hemp manufacturer: A person who extracts, processes, or engages in other manufacturing activities involving hemp, including manufacturing intermediate and finished hemp-derived products.
- Hemp producer: A person who cultivates and harvests hemp, including cultivating plants for transfer to other producers.
- Industrial hemp: The nonpsychoactive, low-THC oilseed and fiber varieties of the plant Cannabis sativa that has no use as a recreational drug and 0.3% or lower THC content.
- Phytocannabinoid: The naturally occurring compounds found in the cannabis plant (including THC and CBD).
- THC: The psychoactive compound tetrahydrocannabinol.
- Unprocessed hemp testing labs: State-licensed facilities that perform analysis of unprocessed Cannabis sativa samples for use in determining eligibility for a harvest certificate.
Marcy Lantz, CPA, CSEP, is a partner with Aldrich Group in Lake Oswego, Ore.
For additional information about these items, contact Ms. Lantz at 503-620-4489 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with CPAmerica Inc.