In a high-risk move that could result in tens of millions of dollars in tax savings and an immediate boost in available cash, five major marijuana multistate operators (MSOs) have broken free from the suffocating grasp of Section 280E of the Internal Revenue Code.
The Controversial Conundrum of Code 280E
The Code 280E, a relic from the 1980’s War on Drugs, directly influences cannabis companies’ tax burden, making it significantly heavier compared to other industries. Despite marijuana’s federally illegal status, the IRS does not excuse tax collection. The quagmire is that while the federal government doesn’t acknowledge the legality of the cannabis industry, it penalizes legitimate, legal state businesses with hefty tax bills. Section 280E stipulates that businesses dealing with Schedule I and II substances can’t deduct business-related expenses from their income before taxes.
Risks and Rewards: The Arithmetic of Tax Savings
The move away from Code 280E could allow these organizations to deduct routine business expenses, such as rent, utilities, and payroll from their income before taxes. These deductions, combined with the regulated market’s potential to generate higher revenue, give cannabis firms a significantly higher chance of flourishing financially.
Wall Street vs. Marijuana Street
As Wall Street keeps a wary eye on this controversial face-off with the IRS, some experts predict changes in marijuana legislation and tax regulations. Several Nasdaq-listed cannabis firms have made the risky constitutional argument that Code 280E should apply only to illicit drug traffickers, not state-regulated, compliant marijuana businesses.
- HARVEST HEALTH & RECREATION: Predicts $50 million to $70 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for 2021.
- COLUMBIA CARE: Proposed revised guidance anticipates tax savings that could add $80 million to $95 million in incremental adjusted EBITDA for 2021.
- LIVWELL ENLIGHTENED HEALTH: Expected tax benefits in the $10 million to $15 million range.
- SCHWAZZE (formerly MEDICINE MAN TECHNOLOGIES): Forecasts $20 million in tax savings.
- GREENLEAF COMPASSION: The New Jersey-based company expects more than $3 million in federal tax savings annually.
Despite these alluring benefits, companies opting out of Code 280E are taking on substantial risk. A negative IRS ruling could result in liability for back taxes, fines, and the potential for lasting damage on their businesses. Weighing potential benefits against significant risks, these firms are on the precipice of a significant, and possibly historic, IRS showdown.
The Implications for Medical Marijuana Patients
While the action is mostly taking place behind the scenes in corporate boardrooms and judicial chambers, the implications for medical marijuana users can be substantial. Improved financial standing for cannabis firms means greater ability to invest in research, product development, and patient care.
Quality Access and Care with MMJ
As part of this ripple effect, companies like MMJ, who provide access to medical marijuana cards in the USA, could see increased capabilities to offer better services and resources to new patients and existing card renewals.
One of these options includes better access to information and resources for an California Medical Marijuana Card. The ability to engage directly with state-specific regulations and obtain legal and reliable medical marijuana care could serve as a significant relief to both patients and care providers.
In conclusion, while the major marijuana MSOs’ struggle with the IRS over Section 280E of the tax code is fraught with risk, the potential rewards make it an indispensable effort. The outcome promises a significant impact on the evolution of the cannabis industry, potentially setting a new precedent for the way marijuana businesses grapple with tax challenges.
