Can CBD companies open bank accounts and deduct business expenses?


by Lauren Estevez, Esq.

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August 2019 update - Credit Unions can work with CBD and Hemp Companies

On August 19, 2019 the National Credit Union Administration announced that Credit Unions can service CBD & Hemp companies so long as they do their due diligence on them and comply with BSA and AML requirements to file Suspicious Activity Reports (SARs) for any activity that appears to involve potential money laundering or illegal or suspicious activity. (more info on these guidelines below).

Read the letter published by the National Credit Union Here.

CBD & Banking Overview & Background

Now that the Farm Bill has passed, a key issue has arisen for CBD brands and operators -- will they be able to take business tax deductions beyond Cost of Goods sold and have access to banking? The Farm Bill, which was signed into law in December 2018, removed hemp and derivatives of cannabis products containing less than 0.3% THC (i.e. CBD) from the Controlled Substances Act. The 1970 Act is what makes cannabis federally illegal, and CBD was on the list until December. (Cannabis remains a Schedule I Controlled Substance, for now). The CBD industry is now forecasted to reach $22 million in annual revenues by 2022. Perhaps most significant with the passage of the Agriculture Improvement Act is that CBD business owners will now be able to process payments, secure bank accounts, and potentially deduct business expenses from their taxes.

CBD companies and access to Banking

Federally insured banks must comply with federal law. This requirement has limited access to banking for many state legal cannabis brands and operators. Now that CBD has been removed from the CSA, it is no longer federally illegal and not in conflict with federal banking regulations. That being said, banks have discretion over which accounts they take on and there has not been clear guidance from the FDIC about how to treat CBD or hemp businesses.

May 2019 Update - House Financial Services Committee Meeting

On May 16th, 2019, the House Financial Services Committee met to discuss a number of issues. Congressional leaders called for CBD banking clarity and guidelines from the FDIC. The FDIC chair responded that banks need to follow FinCEN guidelines and file SARs when necessary. You can watch the exchange between Rep. Barr (Kentucky) and the FDIC Chair here:

FinCEN and CBD

FinCEN has not issued CBD specific guidance but it has issued guidance for state-legal cannabis businesses. The guidelines are based on the Cole Memorandum, which has since been rescinded, but FinCEN confirmed after the rescission that these guidelines still apply.

1. Keeping marijuana out of the hands of minors

2. Keeping marijuana money from going to gangs and cartels

3. Keeping marijuana from going to other states

4. Keeping marijuana activity from being used as a cover for other illegal activity

5. Preventing violent crimes

6. Preventing drugged driving and other public health concerns

7. Keeping marijuana off public lands

8. Keeping marijuana off federal property

The guidance also creates three types of SARs (Suspicious Activity Reports) for banks to file to report suspicious activity for cannabis businesses.

Safe Harbor for Banks - SARs - Suspicious Activity Reports

The reason many banks are hesitant to do business with CBD or cannabis companies is because of risk exposure. Banks do have a safe harbor for activities that they file SARs for. For this reason, many banks will file SARs for all cannabis (and also potentially all CBD) banking clients. The three types of SARs that apply to cannabis businesses are:

  • Marijuana Limited SARs - for cannabis transactions that do not implicate the eight federal priorities outlined above

  • Marijuana Priority SARs - for transactions that do involve the eight federal priorities outlined above

  • Marijuana Termination SARs - for terminating the bank’s relationship with the business.

While cannabis remains illegal federally and hemp and hemp-derived products have been de-scheduled, there has been little clarity from the FDIC for banks to distinguish between these two types of businesses.

How many banks are working with CBD or Cannabis Companies?

FinCEN discloses the number of banks filing marijuana SARs on a quarterly basis. The most recent report from December 2018 shows that 438 banks and 113 credit unions are working with cannabis companies in Q4 of 2018. You can access the full report here. In Q1 of this year, 493 banks reported they were working with MRBs.

Q1 2019 showed 493 banks providing services to Marijuana Related Businesses (MRBs)

Q1 2019 showed 493 banks providing services to Marijuana Related Businesses (MRBs)

438 banks and 113 credit unions filed marijuana SARs in Q4 2018

438 banks and 113 credit unions filed marijuana SARs in Q4 2018

280(e) and CBD

Provision 280(e) of the U.S. Tax Codes prohibits taking deductions for “trafficking in controlled substances.” This includes cannabis and is a hardship for many state-legal cannabis businesses. Note that 280(e) previously excluded “Industrial Hemp” but this is hemp cultivated for research purposes, not CBD sales, and that Cost of Goods Sold has always been deductible. This is a credible argument and ultimately may be an issue that is decided by the Courts, but products legalized by the Agricultural Act should now be able to deduct business expenses since they no longer contravene Federal Law or meet the definition of Controlled Substance under 280(e).

The passage of the Agricultural Act is a milestone for U.S. companies and the hemp economy. Some of the practical considerations for CBD companies like securing payment processing and filing their taxes have now been clarified and will ultimately help these businesses thrive.

Further Reading:

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Lauren Estevez is an attorney who advises international, multi-state and California cannabis brands, operators, and investors. She is nationally recognized as a subject matter expert in Cannabis Law and her work has been featured on CNBC, Bloomberg Law, and SXSW. The National Law Journal awarded Lauren the recognition of Cannabis Law Trailblazer in 2019. Lauren is the founder of LME Law.

Disclaimer: The information provided on the LME Law Blog is for educational purposes only, and is not legal advice or a substitute for legal counsel.

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