While federal legalization is the ultimate goal for our industry, most cannabis professionals probably would list the elimination of Internal Revenue Code Section 280E as a close runner-up.
Of all the challenges the legal industry has faced in its brief history, 280E might just be the most formidable. Or the illicit market. Probably a dead heat.
By denying operators the right to deduct ordinary and necessary business expenses the same way more traditional companies do, the IRS has built and maintained a major hurdle for any and all cannabis companies that hope to turn a profit in the United States. And with every new year, there is renewed hope the federal government will do away with that hurdle.
Will 2024 be the year 280E finally bites the dust?
After President Joe Biden in October 2022 asked the Department of Health and Human Services to reconsider cannabis’s Schedule I status under the Controlled Substances Act, the agency recommended the Drug Enforcement Administration reschedule the plant and its products as Schedule III controlled substances. If the DEA acts on this recommendation, it would have a major impact on the bottom line of every operator across the country—and could have some compelling ripple effects across the industry.
An analysis of financial filings by Green Market Report in 2022 found ten publicly traded multistate operators were carrying more than half a billion dollars in federal tax debt, thanks in part to 280E. Acreage Holdings, Ascend Wellness, Ayr Wellness, Cresco Labs, Columbia Care, Curaleaf, Green Thumb Industries, TerrAscend, Trulieve, and Verano Holdings owed the IRS $507,193,000, according to their 2022 second-quarter financial reports. If the companies were forced to fully pay their federal tax bills, only one of the ten—Green Thumb Industries—would have more than ten months’ worth of cash left with which to continue operating, according to the report.
Rescheduling cannabis in 2024 likely would trigger the elimination of 280E and provide some much-needed market enthusiasm and momentum for an industry that has been in a years-long slump.
“The biggest impact is that there will be this reduced tax burden, so companies will now be more profitable,” said Julie Herzog, a partner at Fortis Law Partners in Denver, who handles a wide variety of corporate, securities, and merger-and-acquisition transactions. “All the expenses like rent and payroll and marketing costs, those are the most significant that we see in the industry. Being able to deduct those is really going to help companies.”
While it’s highly unlikely unpaid taxes due under 280E would be forgiven, there is a good possibility 280E taxation on the industry could end retroactive to January 1, 2024, if rescheduling happens at any point during the year.
4 potential benefits of rescheduling
Reduced banking fees
With more banks offering industry services, there would be more widespread access to banking and payroll services and a reduction in the onerous fees cannabis companies currently pay. Whether or not banking fees will be allowed as write-offs, however, is up to the whims of the IRS.
Larger cannabis companies would be able to structure their business operations more like those of traditional companies, investing in research and development, aggressively growing market share, and offering more employee incentives and benefits.
More opportunity for small businesses
Smaller companies that have been operating in the red and holding on for dear life will be able to survive—and maybe even turn a profit for the first time.
Simplified business structures
Because of 280E, many cannabis businesses have complex and convoluted legal-entity structures. The elimination of 280E would allow companies to simplify their business structures.
Herzog offered a few other predictions about how the industry might look after rescheduling.
“There may be a greater likelihood other companies will come in and do business with companies that are selling marijuana, and maybe more landlords are willing to rent space, and more investors will be willing to come into the market,” she said.
However, as with everything else in Washington D.C., nothing is assured and people should expect the unexpected. When asked about how her clients are preparing for a post-rescheduling, post-280E world, Herzog said most of the companies she works with aren’t holding their breath.
“Most of them are just going about their usual day, and I think they’re pretty wary,” she said. “So many times over the years, we’ve thought there was going to be progress on the horizon in terms of legalization or descheduling or whatever, and then we didn’t see it actually come through.”