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Introduction
In the ever-evolving cannabis industry, innovation is key to staying competitive. Understanding and utilizing Research & Development (R&D) Tax Credits can significantly aid businesses in this sector. This blog post, powered by OnCentive’s expertise, delves into how cannabis businesses can leverage these credits effectively.
1. What is R&D Tax Credit in the US?
The R&D tax credit is a dollar-for-dollar, non-dilutive tax incentive for US-based companies that innovate. The Tax Credit was originally established in 1981. The Protecting Americans from Tax Hikes (PATH) Act of 2015, which broadened the ability of many small-to-midsize businesses to monetize the R&D credit made the credit permanent. Companies across industries can qualify, including early-stage startups and profitable companies. Qualifying expenditures generally include the design, development or improvement of products, processes, techniques, formulas or software.
As per one of the reports of OECD: Between 2000 and 2018, the number of R&D tax relief recipients effectively more than doubled in the US, from around 10,500 R&D tax relief recipients in 2000 to over 26,000 in 2018.
Over the period 2000-2013 period (for which relevant data are available), SMEs accounted for the majority of R&D tax relief recipients with a share of around 70-75% in more recent years.
2. Eligibility Criteria for R&D Tax Credits in the Cannabis Industry
To qualify for R&D tax credits, cannabis businesses must engage in activities that meet certain criteria. These include the development or improvement of products, processes, techniques, formulas, or software. Specifically, activities should involve experimentation to eliminate uncertainty, relying on science or technology. This could encompass creating new cannabis strains, developing hemp-based products, or enhancing manufacturing processes. It’s important for businesses to document their R&D activities thoroughly to substantiate their claims.
3. Common Misconceptions About R&D Tax Credits in Cannabis
There are several myths surrounding R&D tax credits in the cannabis industry. A common misconception is that these credits are only for ‘breakthrough’ innovations. However, even modest improvements in products or processes can qualify. Another misunderstanding is that R&D tax credits are only for large companies with formal R&D departments. In reality, small and medium-sized enterprises, including startups, are eligible if they engage in qualifying R&D activities.
4. Case Study: A Success Story Powered by OnCentive
Consider a cannabis client who developed creams, lotions, and food products from legal cannabis. This process involved extensive testing and development, costing over $2.8 million. With OnCentive’s guidance, the company successfully claimed an R&D Tax Credit of $370,500, underscoring the significance of innovative efforts in the cannabis industry.
5. The Importance of R&D Tax Credits
These tax credits are vital for encouraging innovation in the cannabis sector. They provide financial relief which can be reinvested into further R&D, propelling the industry forward.
Recommended Reading: What is R&D Tax Credit and How Do I Claim it?
6. How OnCentive Can Help
OnCentive’s role in navigating the complexities of R&D tax credits is invaluable. They offer expertise in identifying qualifying activities and ensure compliance, maximizing the benefits for cannabis businesses.
Conclusion
R&D tax credits are a strategic resource for cannabis businesses aiming to innovate and grow. OnCentive’s expertise in this area is a crucial asset, helping businesses to capitalize on these opportunities. For more information, visit OnCentive at oncentive.com or contact them at info@oncentive.com.
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