With the rise in popularity of legal cannabis products comes plenty of regulatory issues to keep up with, analyze, and implement as an accounting professional. Laws and regulations are changing almost daily, so staying in the know is of the utmost importance in keeping you and your clients out of trouble. Keeping up with THC and CBD regulations in the cannabis accounting space can be a daunting and seemingly hopeless task, but we’re here to help. Let’s take a look at some of the legislation that has affected the cannabis industry lately.
Last December 20, Congress passed the Agriculture Improvement Act of 2018 (aka the 2018 Farm Bill), which declassified hemp as a Schedule 1 controlled substance (among other things). Considering that hemp can be any part or derivative of a Cannabis sativa L. plant that contains less than 0.3% THC, CBD would come off of Schedule 1, as well (source: FDA).
From a GAAP accounting perspective, we would still account for hemp cultivation just the same as we would THC, using absorption accounting. From a tax perspective, however, cannabis is still subject to 280e, but hemp/CBD is not. Hemp/CBD is also open to other deductions and tax codes including 471, 263a, farm credits, R&D credits, and 199a, amongst others.
The good news for CEOs is that this will significantly lower their taxes on the hemp/CBD side, while also offering exciting planning opportunities (a mixed-use facility with both THC and hemp, for example, might have further tax allocations to reduce the THC division tax). The good news for accountants is that this is still very complex and requires cost accounting, as well as other bookkeeping and tax strategies. These are the services that a world-class cannabis accounting expert delivers to their clients, and where we can add real value to companies.
Outside of IRS regulations and codes, you also need to consider that hemp is now regulated by the USDA (US Department of Agriculture). The 2018 Farm Bill notes that all cannabis and cannabis-derived products (hemp) are subject to the Food and Drug Administration (FDA) rules.
According to an article on the FDA website, “Other than one prescription drug product to treat rare, severe forms of epilepsy, the FDA has not approved any other CBD products, and there is very limited available information about CBD, including about its effects on the body.” This indicates that the FDA is taking its sweet time in approving any CBD products for therapeutic use. The FDA knows that the results of their tests and experiments on these products can have a serious impact on the future federal legality of cannabis and its derivatives. The agency has also taken the stance that CBD cannot be marketed as a dietary supplement, and won’t do so until more tests and experiments have been completed. As the FDA continues to test the effects of CBD use on the body over varying lengths of time, expect regulatory efforts to be fluid and constantly changing.
As a side note, there are also complex state and local laws around both cannabis and hemp/CBD, and these can vary greatly. State CBD legislation ranges from legalization (as in Texas) to prohibition (such as in Indiana). Much like the federal government, many states where hemp/CBD is legal will not approve CBD for use in food products (edibles and drinks) until more results on the long-term effects of use are known.
The 2018 Farm Bill brings good news for CEOs, in that there will be lower tax rates and more tax planning opportunities. Keep an eye on changing and evolving regulations, as continued regulation and oversight by the FDA will lead to more audits and inspections. Compliance will be key for any successful cannabis company, so don’t skip any steps or cut any corners.
Accounting and tax management will remain complex and specialized in this industry, and cannabis/hemp/CBD accountants will be in high demand. Find out more about CBD vs THC industry by viewing our webinar HERE.