CBD emerges as promising segment of cannabis market in Maine

by The ARB Team

By Karla J. Brannen, CPA
Cannabis Advisory Services Practice Leader

Recent changes in state and federal laws have set the stage for hemp cultivation and sale to take off in Maine. Moreover, entrepreneurs are finding that the market for CBD – a compound derived from hemp – is growing as consumers become educated about the differences between CBD and its psychoactive cousin found in marijuana, THC.

But cannabis entrepreneurs would do well to become educated about the differences in legality between hemp and marijuana – both of which are varieties of cannabis – and the ramifications for running a cannabis business.

Cannabidiol – CBD – is a natural compound found in the flower of the cannabis plant, including both the hemp and marijuana varieties. The difference is that CBD derived from hemp does not contain THC. Consequently, while federal law still prohibits the cultivation and sale of marijuana, hemp and CBD are legal at the federal level. Under the federal farm bill of 2018, hemp was removed from the list of Schedule I controlled substances and is now considered an ordinary agricultural product. 

The significance of the new federal treatment of hemp is that hemp farmers may now access federal water rights, agricultural grants, and crop insurance, as well as the full benefits of the banking system.

Maine state law 

At the state level, a new Maine law allows sellers to include CBD in food products, essentially redefining CBD as a food additive rather than a medicinal product. This effectively broadens the market for CBD in Maine and allays concerns that entrepreneurs had about previous state law.

As for marijuana, it is legal in Maine for medicinal purposes, and there are about 2,400 licensed medical marijuana caregivers in the state. However, marijuana is still not legal for recreational use in the state. 

All of this means that the cannabis industry in Maine is becoming increasingly stratified as the market for CBD and marijuana grows, and entrepreneurs need to navigate the market with a clear understanding of what the law allows and of the unique finance and accounting issues associated with cannabis.

Clear sailing for CBD

For hemp cultivators and CBD sellers, now that hemp-derived CBD is legal at both the federal and state levels, the finance and accounting methods used, as well as choice of business entity structure, are the same as other agricultural and retail industries.

Federal tax issues for marijuana

Since marijuana cultivation and sale is still illegal at the federal level, growers and sellers must be well versed in the provisions of Section 280E of the Internal Revenue Code, which forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.

Under IRC Section 280E, businesses are allowed a deduction for the cost of goods sold, even where the goods are illegal under federal law. “Costs of goods sold” is essentially inventory cost, including the cost of the product and any directly related expenses.

However, the IRS applies this very narrowly to cannabis companies. As a result, marijuana growers and retailers must use specific methods of accounting and inventory management in order to maximize any benefit from the law.

Ultimately, under IRC Section 280E, marijuana cultivators can deduct direct business expenses from federal taxes such as equipment, labor, fertilizer, supplies, rent, utilities, water, and lab services.

On the retail side of the marijuana industry, store owners are only allowed to deduct  expenses defined as the “cost of goods sold,” which include the wholesale cost of the marijuana and other products sold. 

However, if a marijuana retailer also sells non-marijuana items, such as marijuana paraphernalia, t-shirts, or foods that do not contain THC, the retailer may deduct the costs associated with that merchandise. Therefore, marijuana retailers are wise to arrange their stores carefully, physically separating the marijuana from non-marijuana goods. This way, the square footage of the retail shop that is dedicated to non-marijuana goods can be calculated, and the proportion of rent, utilities, and insurance that covers that area can be considered for deduction.

Market shift to CBD

As consumers are becoming more knowledgeable about the differences between CBD and THC, and as federal and state laws are changing to bring CBD into the business mainstream, more entrepreneurs are expected to enter this end of the cannabis industry. CBD is marketed in many products, including foods, lotions, balms, and oils, and is touted as providing relief from pain, anxiety, depression, and other conditions.

If you have questions about the cannabis industry or about ARB’s Cannabis Advisory Services, contact Karla Brennan, CPA, at 207-772-1981.

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