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10/15/2018
Cannabis Research Efforts Progressing Despite Federal Tax and Banking Regulations
Because cannabis is a federal Schedule I drug, there are significant challenges for organizations operating within states where medical and recreational use is legal. Schedule I status poses several hurdles, including significant limitations in the banking and financial industries. This may impede the life sciences industry from quickly uncovering the potential medical benefits cannabis holds, through research.
Taxation also is a challenge. The Internal Revenue Code Section 280E tax limitations result in tax rates that are many multiples of tax burdens more than in other industries. A multilayered bureaucracy of state and local sales and use taxes increase the tax burden even more. The Research and Development Tax Credit and other federal incentives are not available to U.S. based cannabis companies, putting them at a competitive disadvantage to other non-cannabis based companies. This is simply not an environment in which most biotech and life sciences companies are used to operating.
When the Tax Cuts and Jobs Act of 2017 became the law of the land, it offered no relief from IRC Section 280E for cannabis businesses. Notwithstanding, there are still significant tax reductions available to cannabis taxpayers if they know where to look. CohnReznick’s experienced practitioners can assist cannabis industry participants, including ones in the biotech and life sciences industries, navigate the tax code and the available deductions.
One challenge for these companies is that cannabis research is often complex given that it is a plant with over 400 chemical compounds. As more research is done within the life sciences and biotech space, there may be a need to synthetically produce compounds that are found to be beneficial, but are too scarce to source from actual cannabis. But because of the obstacles in the cannabis research process, this may take a long time before it comes to pass. 280E also has potential impacts for synthetically derived cannabinoids. Although the IRS has not addressed the issue, some people believe that synthetically derived THC from yeast should not be subject to 280E limitations because it is not actually cannabis. This uncertainty may further discourage investment in the space.
A point of irony regarding medical cannabis research is with the development of cannabidiol-based medicines. Cannabidiol (CBD) is a is a naturally occurring substance in cannabis, and does not have intoxicating effects like those caused by THC, the primary psychoactive ingredient in marijuana.
The National Institute on Drug Abuse, a U.S. government agency, reports that the chemical in marijuana that causes the high (and many of its other effects) is delta-9 tetrahydrocannabinol, or THC. But there are over 100 other cannabinoid chemicals in the plant; CBD is one of those. Different cannabinoids can have very different biological effects; CBD, for example, does not make people high and is not intoxicating. And, there is reason to believe it may have a range of uses in medicine, including in the treatment of seizures and other neurological disorders.
However, positive steps are being taken when it comes to government agency approval of certain types of medicinal cannabis research.
The FDA announced in June the approval of Epidiolex, which contains a purified drug substance derived from marijuana, for the treatment of seizures associated with two rare forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older.
Another step in the right direction is that the University of California San Diego’s Center for Medicinal Cannabis Research received DEA approved plans to import capsules containing CBD and THC from British Columbia, Canada-based company Tilray to study the drugs’ effectiveness in treating essential tremors that afflict an estimated 10 million people.
It is important that companies conducting medical research related with cannabis work with tax and accounting professionals that understand the unique tax complications of these two industries and how cannabis regulations further complicate research. The CohnReznick cannabis industry team understands the interplay between taxes, funding, and cannabis research being undertaken in the bio-tech and life-sciences industries.
CohnReznick Partner Michael Harlow had the honor recently of moderating a panel discussion on the legal, medical, and regulatory landscape around cannabis and cannabidiol-based medicines, at a recent Biocom event. “Accelerating life science across California,” Biocom is an organization that works on behalf of over 1,100 members to drive public policy, build an enviable network of industry leaders, create access to capital, introduce cutting-edge workforce development and STEM education programs, and create robust value-driven purchasing programs.
Subject matter expertise
Michael D. Harlow
CPA, Partner, Managing Partner – Cannabis Industry
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CohnReznick's Cannabis Industry Practice
This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.