By: Nick Richards and Keith Buckley
With the growing decrease in regulation surrounding Hemp Cultivation, many question whether Hemp producers remain subject to Internal Revenue Code Section 280E – which prevents businesses “trafficking” in a controlled substances from deducting their business expenses. IRC Section 280E greatly impacts state legalized cannabis businesses (and their profits) and, as might be imagined, it is important to know whether the same restrictions apply to Hemp. There may be some reason to think they do not apply because Hemp has low psychoactive properties and does not appear to be addictive or dangerous (though additional science is needed). Nevertheless, the Federal government continues (even after recent review) to view Hemp production as trafficking under the Controlled Substance Act and, thus, subject to Section 280E.
What is Hemp? In short, Hemp is a specific variety of the cannabis plant that is non-psychoactive (less than 1% THC). Throughout history, Hemp has been grown and cultivated to produce many commercial products such as paper, textiles, and clothing. The US founding fathers all grew hemp and some southern states mandated hemp production for landowners because the plant was so important. Today, many countries continue to grow and refine industrial hemp and export it around the world and many believe it is better and less environmentally degrading than wood pulp (paper) or cotton. Unfortunately, Industrial Hemp became wrapped up in the broad definition of ‘marihuana’ in the Marihuana Tax Act of 1937 and the Controlled Substances Act of 1970.
Section 280E disallows deductions for expenses incurred in trafficking (selling) a Schedule 1 or 2 controlled substance under the CSA. Marijuana is listed as a Schedule 1 controlled substance along with Heroine. However, because of the CSA’s broad definition of ‘marihuana,’ Hemp has been, and continues to be, broadly confused with marijuana as a drug and thus subject to Section 280E.
In 2015, the US Congress passed the Industrial Farming Act of 2015 which allows States to regulate their own industrial hemp industry. The Farm act also specifies that Hemp fibers and sterile seeds are not subject to the CSA and thus are not impacted by Section 280E. However, all other parts of the plant remain schedule 1 controlled substances and, should there be any doubt, the US Drug Administration recently listed CBD (Hemp Oil) as a schedule 1 controlled substance along with THC, its psychoactive cousin.
Thus, in growing a hemp plant – the stalks and sterile seeds are legal under Federal Law but the rest of the plan is not!
At the state level, Colorado permits cultivation of Industrial Hemp and has expressly excluded Industrial Hemp from the definition of Marijuana. This important distinction allows for Industrial Hemp to fall outside of the special state Marijuana Excise and Retail Sales Taxes. The distinction, however, does not impact Federal taxation of Hemp pursuant to IRC Section 280E.
Is there change on the horizon? Currently, there is a bill in the US Congress (H.R. 3530 – Industrial Hemp Farming Act of 2017) seeking to amend the Controlled Substance Act to exclude Industrial Hemp from the definition of ‘marihuana’. Unless it passes, Industrial Hemp will continue to be subject to Section 280E.
Dill and Dill helps individuals and companies understand and defend their tax positions, form entities, and obtain licenses. If you are interested in more information on Industrial Hemp or are facing a state or IRS audit, we are here to help.