The 2018 Farm Bill – What it Means for Hemp Farmers’ Tax Bill

December 27, 2018
bencondon
Banking, Finance & Real Estate, Cultivation, Hemp Business Executive, Hemp Industry News, Hemp Policy & Legal, News & Insights, Policy & Legal
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CPA Covers The Income Tax Implications for Hemp Farms after the new 2018 Farm Bill

The Agriculture Improvement Act of 2018 (the 2018 Farm Bill) has officially been signed into law. One of the major components of this legislation of industrial hemp. This blog post will mainly focus on what the tax implications of this legalization and contrast tax differences of a federal legal hemp business versus a federally illegal business subject to section 280E.

Why Hemp? For traditional farmers, rising costs and imports of foreign low-priced produce have made it difficult to turn a profit. There is currently a glut of recreational cannabis producers in Oregon driving down the wholesale prices so low most producers can’t afford to continue to operate. Cannabis cultivation is also heavily regulated including the canopy size a grower can use. As a result, the switch to hemp is logical choice.

280E No Longer Applies

Previously, hemp related businesses were often subject to section 280E, and therefore could not take any business deductions or credits, and the only cost recovery is via cost of goods sold. This is no longer the case, now hemp producers can tap into the favorable farm tax rules, which we’ll dive into.

No Need to Track Inventory

For farms with less than $25 million in gross receipts over the past three years, there’s no need to track inventory. What does that mean? It means there’s no add-back to taxable income for ending inventory. If a farm has not sold off all of its year’s harvest prior to year end, it still can deduct all of the costs into it took to produce it. Previously, when hemp was a controlled substance, the act of growing hemp (and still for cannabis) was deemed manufacturing, not farming, which requires an add-back of ending inventory at year end.

Expanded Use of Cash Method of Accounting

Again, farms with less than $25 million in gross receipts over the past three years can use the cash method of accounting. What does this mean? With the cash method available, and no requirement to track inventory, It means that a farms will have a great ability to manage their taxable income by purchasing supplies, fertilizers, equipment, ect. in preparation for the next year’s harvest and take those deductions in the current year.

Bonus Depreciation and Sec. 179 Expending

Until January 1, 2024 eligible equipment is available for immediate 100% bonus depreciation. This now applies to certain used property too, previously, property needed to be brand new for use to be eligible.

Sec. 179 provides for the full immediate deduction similar to 100% bonus depreciation, and has generous dollar limits up to $1 million can be immediately deducted in 2018 (with several limitations and thresholds). Sec. 179 is available for single-purpose horticultural structures.

Greater Access to Banking and Borrowing

Most businesses take the ability to bank for granted. Without the ability to bank, businesses are at risk of theft and record keeping can be very cumbersome. With banking bookkeeping is made easy, your cash is kept safe and counted at all times, and you’re able to send and receive large sums of money safely and securely. Also, without banking, the ability to borrow or obtain a line of credit was nearly impossible.

Farms with a solid business plan and history of earnings should theoretically now have access to borrowing. Borrowing or leveraging can allow a business to expand with little capital and can greatly increase the return on investment if done effectively.

Recipe for Success

With the ability to borrow and by employing the favorable tax rules listed above, a hemp farm has the ability to expand rapidly virtually income tax-free by reinvesting its earnings into the various immediately deductible items. That is, of course, until its average gross receipts exceeds $25 million per year, not a bad place to be.

Ben Condon

Ben, a partner at BC Consulting and BC CPAs, is a proud native of the Pacific Northwest, born in Washington and grew up in Oregon. He earned his bachelor’s and master’s degrees in accounting from the University of Oregon. He has been an active CPA in the state of Oregon since 2008 and has extensive business tax experience focusing on corporate and flow-through entities.

He has a combined 9 years of Big 4 experience at Ernst & Young and Deloitte and has served clients ranging from large multistate, multinational Fortune 500 companies to startups and every size in between. His clients represent various industries including commercial and residential real estate, manufacturing, private equity funds, hedge funds, biotech, and high-tech.

Ben puts his broad ranging and unique skill set to work benefiting clients within the cannabis industry. When he isn’t serving his clients, Ben enjoys traveling (36 countries and counting), craft beer and coffee, snowboarding, music festivals, camping and hiking, and going to Ducks, Blazers and Timbers games. In addition to his CPA, he is also certified yoga teacher and scuba diver.

If you would like to have BC Consulting review your returns for possible tax savings, please reach out to Ben at 503-303-3730 or email [email protected]

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