Accounting in the Hemp Industry

In the hemp business, accountants are in high demand. Hemp was legalized at the federal level in the U.S. in 2018, and since then different states have formulated laws to govern hemp cultivation and production. So far, hemp cultivation has been legalized in 47 states to different extents. Idaho, Mississippi, and South Dakota are the 3 that have yet to permit hemp cultivation. 

The hemp industry, though legal, is highly regulated. This makes accounting in this industry very intensive, as the accountant has to consider the different laws and regulations that apply in their respective jurisdiction. The following is a list of issues that impact hemp accountants:

  • Many accountants are not familiar with hemp laws
  • The laws governing the hemp industry keep changing
  • There’s a lack of accounting tools that are tailor-made for the hemp industry
  • Some accountants are reluctant to deal with clients in the hemp industry
  • Accounting software made for the hemp industry is often inefficient, meaning that a lot of work has to be done manually
  • The seed-to-sale (provenance) software for hemp does not integrate well with accounting software
  • The hemp industry is highly regulated, so laws for hemp accountants are very strict
  • There are heavy penalties when accounting errors happen  

Which Accounting Laws Apply To Hemp Businesses?

Accounting in the hemp industry follows general federal taxation laws. To be more specific, these laws are IRC 471, IRC 263A, Sec. 199A, and farm accounting principles. The IRS’ Farmers Tax Guide, which can be downloaded from the IRS website, lists all the relevant tax laws and regulations that apply to hemp farmers. Because hemp is classified as any other agricultural commodity, Form 1040 must be filed.

The accountant can also provide insight on whether cash or accrual accounting is more suitable for the business. Cash accounting will allow the accountant to defer tax remission, which can be advantageous, but at the same time accrual accounting gives a clearer picture of the financial position of the business. This can help the hemp business determine proper valuation and raise capital.

The accountant must also note the state and local tax and compliance issues that affect the hemp business. They should be able to offer solutions for any accounting challenges that may arise.

The U.S. Department of Agriculture (USDA) oversees the cultivation and production of hemp in the U.S. Hemp laws are updated regularly, and the updates may indirectly affect accounting requirements.

If you are an accountant looking to offer your accounting services in the hemp industry, here are a few points to get you started.

Section 280E Does Not Apply

Following the passing of the Agricultural Act of 2018, hemp businesses are no longer subject to Section 280E of the Internal Revenue Code. This means that hemp businesses can now make deductions of the cost of goods sold when calculating tax obligation. This includes all the business expenses that are deductible by other traditional businesses. Note that marijuana (or hemp with more than 0.3% THC) businesses are still subject to this section. 

Ensure That The Hemp Business Is Licensed

Hemp businesses must be licensed by the USDA or a USDA-approved industrial hemp production plan. Once the business is legally registered, the accountant may claim hemp cultivation tax benefits. 

Claim Tax Credits For Hemp Farming

Federal tax credits that apply to traditional agriculture also apply to hemp farming. Fuel and road use credit can be claimed for hemp cultivation, transportation, processing, and storage. 

Claim Allowable Expenses For Soil And Water Conservation

Hemp businesses can claim expenses incurred due to environmental conservation efforts. This reimbursement can be made to all agricultural businesses and helps to reduce the tax burden on farmers.