Paul L. Caron

Tuesday, May 7, 2024

WSJ: Reclassifying Marijuana Would Unlock Billions In Tax Savings For Cannabis Companies By Repealing Section 280E

Wall Street Journal, Reclassifying Marijuana Could Unlock Billions in Tax Savings for Cannabis Companies:

Many U.S. cannabis businesses could become profitable for the first time if the Biden administration follows through on its plan to reclassify marijuana as a less dangerous drug.

That is because the change could lift a heavy income-tax burden: Section 280E of the federal tax code currently bars cannabis businesses from claiming deductions on many basic business expenses. That rule often results in an effective tax rate of 70% or more, wiping out most licensed marijuana retailers’ earnings. ...

Congress created Section 280E of the tax code in 1982, when Sen. Bill Armstrong (R., Colo.) tucked the provision into a larger bill as the federal War on Drugs was ramping up.

The law denies many ordinary deductions and tax credits to businesses that are “trafficking in controlled substances” listed under Schedule I and II.

When marijuana was illegal at the federal and state levels, that deduction limit had a relatively small impact, and it mostly gave U.S. authorities an additional tool to go after drug dealers and impose taxes on top of criminal prosecutions. But state legalization combined with Section 280E created an odd hybrid. The cannabis industry looked like regular businesses in many respects—except for the income-tax bills. ...

The current tax rules allow cannabis businesses to deduct their cost of goods sold, so growers that put most of their resources into production don’t get hit hard. Businesses closer to the consumer get hammered by Section 280E. For instance, a retailer selling clothes or food can deduct rent, marketing and wages when calculating taxable income. But a cannabis retailer typically can’t take any of those deductions.  ...

More broadly, moving cannabis to Schedule III could create an unusual tax regime. Businesses would still face significant state taxes and high costs for banking and other services. But cannabis would actually have more favorable federal tax treatment than alcohol and tobacco, which are subject to federal excise taxes on top of income taxes.

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