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Education

An unexpected upside for

cannabis-ancillary businesses

It's taken nearly two years for the USDA to finalize gov-
ernment rules for hemp, and it continues to refine its ap-
proach based on public feedback, but here are the current
guidelines for industrial hemp and medical marijuana:
• Industrial hemp is the cannabis sativa plant that
contains less than 0.3 percent THC. It is legal in all
50 states and also at the federal level. Usually culti-
vated outdoors, the entire plant can be used, from
root to bud.

• Marijuana is any cannabis sativa plant that exceeds
0.3 percent THC. Medical marijuana is currently le-
By Tyler Kem gal in 39 states, but still illegal at the federal level.
Strike Tax Advisory Shorter and bushier than industrial hemp plants,
commercial marijuana is usually grown indoors.
lant-touching businesses, or businesses "touch-
ing" the hemp plant, may be the first kind of While the plants look different, the federal government
business that comes to mind when you think only cares about their THC content. The USDA requires
P about cannabis. If you're in a state that legalized growers to submit samples of their crop to USDA labs to
marijuana, you've probably seen marijuana dispensaries verify that the hemp meets current regulations. Any crop
pop up all over town. Consequently, they're often the that's "hot," or that exceeds the legal amount for THC, must
most visible part of the cannabis industry. be destroyed by the farmer.
Potentially qualifying
For savvy entrepreneurs who want to tap into this hemp activities
nascent industry but hesitate to jump into a public-
facing cannabis shop, some of the financial advantages Because "cannabis-adjacent businesses" is such a broad
of investing in a cannabis-ancillary business are worth term, it's helpful to think about the kinds of activities that
serious consideration. For example, the R&D tax credit, could qualify for the tax credit. Just like the original R&D
popular for decades with American innovators, can now tax credit, qualifying hemp activities need to meet the
be claimed by business owners in some cannabis-adjacent four-part test.
businesses.
1. Develop or improve a new product, process, for-
There are seven or eight cannabis related businesses that mula, or software.
support every retail shop. It's vitally important, however, 2. Evaluate feasibility of a new product, process,
for entrepreneurs to understand which businesses qualify formula or software through a process of elimina-
for the hemp R&D tax credit before they try to capitalize tion.
on this lucrative opportunity. 3. Rely on principles of hard sciences like chemis-
Industrial hemp and medical marijuana: what's the try, biology, computer science or engineering.
difference? 4. Use a process of experimentation to eliminate
uncertainty.
To take advantage of the hemp R&D tax credit, businesses
need to familiarize themselves with the specific require- Applying the four-part test to hemp activities might look
ments outlined by the IRS and the 2018 Farm Bill. This re- like:
cent legislation expanded hemp cultivation broadly, with
Brookings reporting that it "explicitly allows the transfer • Building software to track seed-to-sale inventory
of hemp-derived products across state lines for commer- • Improving the extraction process for optimal
cial or other purposes. It also puts no restrictions on the yields
sale, transport, or possession of hemp-derived products, • Automating a manual process
so long as those items are produced in a manner consistent
with the law." • Designing or improving new storage or extraction
facilities

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