Earlier this year, the Department of Health and Human Services recommended that cannabis be moved to Schedule III of the Controlled Substances Act. This recommendation is currently being reviewed by the U.S. Drug Enforcement Agency (DEA). In the event that marijuana is reclassified, cannabis companies will no longer be affected by Section 280E of the IRS code.
Section 280E specifically forbids any business linked to the trafficking of substances classified under Schedule I or II from deducting business expenses from their federal tax returns. Surprisingly, however, the cost of goods sold, whether it’s drugs or other products, is still an allowable deduction.
This change will allow cannabis businesses to claim deductions for business expenses incurred during the financial year.
Section 280E was introduced in the early 1980s when Congress amended the tax code following a court ruling that allowed Jeff Edmondson, a convicted cannabis and cocaine trafficker, to claim deductions for expenses incurred during the sale of drugs.
Whitney Economics cofounder Beau Whitney believes the tax code affects cannabis retailers the most. As per his estimations, cannabis retailers in America collectively pay about $2 billion more on their federal returns. If section 280E didn’t apply, these businesses would be able to deduct their expenses.
In total, these monies add up to a tax rate in excess of 70%, almost four times higher than the 21% tax that other businesses pay on corporate income. This doesn’t mean that growers and manufacturers aren’t affected; they are, just to a lesser extent, because they usually aren’t paid until their products are sold.
It is expected that the DEA may reschedule cannabis in the first half of 2024. This change is expected to significantly decrease the cost structure of the marijuana industry, particularly for the retailers. The reduced tax burden could also lead to a decrease in retail prices for consumers, which could cause demand for marijuana products to increase.
Additionally, businesses would be able to plough returns back into their businesses. Adam Goers, senior VP for The Cannabist Co., stated that the loss of 280E would bring additional capital to the industry, for both small and large firms. This together with SAFE Banking, he noted, would establish a sustainable industry and allow focus to shift toward the federal legalization of marijuana. At the moment, however, marijuana remains classified as a Schedule I drug. Drugs under this classification are identified as having no accepted medical use and a high potential for abuse.
The anticipated scheduling change would be a big boost to the cannabis industry, including companies such as TerrAscend Corp. (TSX: TSND) (OTCQX: TSNDF) that would not only benefit from getting relief from 280E but would also be able to access more institutional capital to expand their operations.
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