There have been many questions about how certain changes in federal policies could influence cannabis operators, particularly from a tax and operations perspective. This month we thought we would take a look at a few of the proposed changes and their implications.

Rescheduling of Cannabis to Schedule 3.

The timing and rules associated with the change from Schedule 1 to a Schedule 3 designation is still in flux. A hearing with the DEA will be held in Washington D.C. on December 2. Whitney Economics is in preliminary negotiations to provide expert testimony at this hearing.

One of the most talked about benefits of the rescheduling is the elimination of the IRC 280E-related taxes at the federal level. Based on an analysis we published in July, the cannabis industry is forecasted to pay an excess $2.4 billion in tax compared to what they would have paid without 280E in effect. If left unchecked, this is forecasted to increase to $3.6 billion by 2027 and $5.2 billion by 2030. 

The elimination of 280E-related taxes would be beneficial to cannabis operators, particularly given the fact that there are an estimated $3.8 billion in delinquent payments (just between plant touching operators) and only 27.3% of current cannabis operators in the U.S. are profitable.

Key Provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 Expire.

In 2017, legislation was passed in Congress to significantly cut taxes for many individuals and corporations in the U.S. Some of these were permanent cuts and some were temporary. The temporary cuts require periodic renewal to remain in force. The renewal period is set to expire in 2025, so without a renewal, personal income taxes will increase for most individuals.

Part of this legislation also included temporary tax cuts on deductions related to small business income. The TCJA provided a 20% deduction for qualified pass-through income (Read Section 199A here) for sole proprietorships, partnerships, and S-corporations.

If the TCJA expires, this deduction will no longer be available. Many cannabis businesses are small businesses, so this could result in an increase in federal tax liabilities. Whitney Economics strongly recommends that operators in the cannabis space be prepared for this and assume these tax deductions will expire. It would be best to work with your CPAs and tax preparation experts to understand the significance of this issue and to prepare ahead of time.

Increase in Corporate Taxation from 21% to 28%.

While there are some parts of the TCJA that were temporary and required periodic renewal, some tax changes were permanent. One permanent rule was reducing the corporate tax rate from 35% to 21%. This was very beneficial to cannabis operators, as it lowered the overall effective tax rates. There is now a proposal to increase the corporate tax rate from 21% to 28%. This introduces the possibility that even if rescheduling occurs, some of the tax benefits of rescheduling that would be derived from 280E reform may not be fully realized due to this corporate tax increase. 

We ran the numbers - If 280E remains in place AND the tax increase is applied to all cannabis operators, this would result in a tax increase of $900 million in 2025 alone. We are not trying to sound the alarm too loudly. The Biden administration had aspirations to increase the corporate tax to 28%, but the increase never materialized.

Taxes are More Boring than Economics, but Important Nonetheless.

While taxes are the most mundane of topics at dinner parties and social events, they are a very significant topic for cannabis operators large or small. Hopefully, these three vignettes helped to articulate the impacts tax policy change may have and how important it is to stay abreast of this topic as a cannabis operator.

Learn more at the Whitney Economics website.