Cannabis Research Efforts Progressing Despite Federal Tax and Banking Regulations
By Michael Harlow and Craig Golding Partners at CohnReznick
There are some unique challenges to conducting research in the United States on the medical applications of cannabis. Cannabis’ federal Schedule I classification presents several obstacles for cannabis industry operators and businesses, even for those located in states where medical and recreational use is legal. Strict limitations on banking make it difficult for most cultivators and distributors to access traditional banking services. And the limitations to cannabis businesses directly affect access of cannabis for consumption as well as significant and critically needed research in both the biotech and life sciences industries.
The Internal Revenue Code Section 280E tax limitations result in tax rates that are several times that of the tax burdens in other industries. The multilayered bureaucracy of state and local sales and use taxes increase the tax burden even further. 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 not an environment in which most biotech and life sciences companies are used to operating.
When the Tax Cuts and Jobs Act of 2017 was enacted, it offered no relief from IRC Section 280E for cannabis businesses. Notwithstanding there are still significant tax reductions available to savvy cannabis taxpayers. CohnReznick’s experienced practitioners can assist cannabis industry participants, including those in the biotech and life sciences industries, navigate the tax code and the available deductions.
One challenge for these companies arises from the complexity in researching a plant with over 400 chemical compounds. 280E has potential impacts for synthetically derived cannabinoids. As research progresses within the life sciences and biotech space, there may be a need to synthetically produce compounds that are too scarce to source from the actual plant. Although the IRS has not addressed the issue, scientists believe that synthetically derived delta-9 tetrahydrocannabinol (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.
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 THC. However, there are over 100 other cannabinoid chemicals in the plant, CBD being one. 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.
The University of California San Diego’s Center for Medicinal Cannabis Research received DEA approval 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.
The CohnReznick cannabis industry team understands the interplay between taxes, funding, and cannabis research being undertaken in the biotech 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.
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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 members, 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.
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