There’s that old saying about death and taxes. In the U.S. marijuana industry, it can almost seem like death by taxes.
Because they are “trafficking” in a Schedule 1 substance, marijuana companies are prohibited by IRS Code Section 280E from taking certain tax deductions and credits that federally legal businesses enjoy. That means the effective tax rate for marijuana retailers can exceed 70%. A downgrade to Schedule 3, which President Donald Trump in August said his administration is considering, would remove that tax headache and pave the way for more institutional investment and traditional banking services.
Congress created Section 280E in the early 1980s after a tax court ruled a convicted drug dealer could deduct business expenses.
“In those days, there were no state-regulated cannabis businesses bleeding millions of dollars a year,” Matt Karnes, founder of cannabis industry financial analysis and research firm GreenWave Advisors, said in a recent research note. “But here we are … and the pretax losses are accumulating and are sizable.”
From 2019, when many marijuana companies went public, to last year, the industry has potentially missed out on more than $1.2 billion in tax savings based on 12 large companies, and there are about $1.8 billion in unpaid 280E taxes, including interest and penalties, among the larger operators, according to Karnes’ research.
That means companies that operate in the U.S. that have been able to make a go of it despite the tax burden would be even stronger without it, which is why the industry gets excited, and share prices pop, whenever investors and traders get a whiff of a potential legal change.
Read more at US News and World Report
