Can CBD companies open bank accounts and deduct business expenses?
by Lauren Estevez, Esq.
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.
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.