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The United States cannabis sector is reaping the benefits of long-awaited tax relief as more states, currently standing at 20, have sanctioned legislation that grants exemptions to businesses from Section 280E of the federal tax law. During the spring, lawmakers in Illinois, Connecticut, New York, and New Jersey passed bills that will enable marijuana companies to reduce their business expenses from state income taxes, despite the fact that these businesses are still illegal under federal law.
The expected savings could be substantial for larger businesses, depending on the corporation tax rate imposed by each state.
Nevertheless, the state-level exemption does not impact the federal taxes that marijuana companies are liable to pay, and these businesses will still be prohibited from deducting expenses for national income taxes. Section 280E of the Internal Revenue Service (IRS) tax act prohibits marijuana businesses from claiming conventional business deductions due to the classification of the plant as a Schedule 1 substance under the federal CSA.
The Marijuana Policy Project (MPP), a Washington, D.C.-based advocacy group, claims that legislation to free businesses from the restrictions of 280E has been passed in 16 states where recreational cannabis use is allowed. In contrast, 280E has not been waived for the adult-use cannabis sector in Arizona, Alaska, Maine, Washington State, or Nevada, while Rhode Island’s attempts appear to have stagnated in a legislative committee. Also excluded from 280E under state tax regulations are medical marijuana businesses in Washington, D.C., Arkansas, Maine, Louisiana, and Hawaii.
Legislators are passing exemptions that let the cannabis industry operate and deduct business expenditures similarly to any other industry in recognition that the existing tax rates are unsustainable and that tax income may decrease further if businesses break down.
However, since corporate tax rates vary across states, the benefits derived from state exemptions will differ depending on the location of the companies.
For instance, whereas Illinois has a flat corporation tax rate of 9.5% for all businesses after decoupling from 280E in May, Nevada has no corporate tax. New Jersey permits deductions for both corporate company tax and gross income tax, while some jurisdictions could have limitations on deductibility.
Nevertheless, industry watchers are mostly optimistic about big federal-level improvements. The cannabis industry will likely pay an additional $1.8 billion in 2022’s federal taxes compared to noncannabis businesses, according to research done by Oregon-based Whitney Economics. This sum is anticipated to reach $2.1 billion this year. In the meantime, investors are closely monitoring the progress of President Joseph Biden’s administration, which recently declared its desire to examine and perhaps change the scheduling of cannabis.
With or without a scheduling change for marijuana, the pharmaceutical-grade formulations being developed by enterprises such as IGC Pharma Inc. (NYSE American: IGC) from cannabis may not be affected. This is because these companies have to adhere to an existing set of requirements overseen by the FDA, the regulator responsible for approving any drugs before they enter the healthcare market.
NOTE TO INVESTORS: The latest news and updates relating to IGC Pharma Inc. (NYSE American: IGC) are available in the company’s newsroom at https://cnw.fm/IGC
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