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.