By Jim Chinn, CPA, Tax Senior Manager
Proposed Legislation Could Provide Tax Savings for Legal Cannabis Industry
On April 1, 2022, the US House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act) which, among other things, would decriminalize marijuana by removing it from the Federal controlled substance list. This legislation, if passed by the Senate would have a huge tax savings impact on the legal cannabis industry across the country.
Virginia Cannabis Laws
In the last few years, many states, including Virginia, have legalized the adult recreational use of marijuana and a number of other states have approved the medicinal use of marijuana. It is important to note that while possession and cultivation of marijuana is legal in Virginia, the retail sale of marijuana isn’t scheduled to begin until 2024.
As a result, the legal marijuana industry has grown substantially over the last several years. These businesses are required to pay federal income taxes on the profits from their legal marijuana business; however, Section 280E of the internal revenue Code imposes a severe tax hardship on these businesses.
Overview of Section 280E
Section 280E was passed in 1982 as part of the war on drugs of the Reagan Administration and provides that no deduction shall be allowed for expenses paid or incurred in the illegal trafficking of drugs listed in the Federal Controlled Substance Act. Although the recreational use or medical use of marijuana has been legalized in a large number states, marijuana is still listed as controlled substance on this Federal list. As a result, under this section of the Internal Revenue Code, legal state cannabis businesses have not been able to deduct on their tax returns the expenses that they have incurred in operating the businesses. This has caused these businesses to pay a much higher amount of federal and state income taxes on their business operation.
It should be noted that Section 280E does allow these businesses to take cost of goods sold deductions.
Tax Savings Opportunities for the Cannabis Industry
This legislation, if passed by the Senate, would remove marijuana from the Federal list of controlled substances. In so doing, the legislation would allow legal cannabis businesses to take federal and state tax deductions for all of the expenses incurred in operating the business. This action would significantly improve the cash-flow and profitability of those in the cannabis industry and significantly improve the competitive landscape for these operations.
At the time of this writing, it is not clear if the legislation will pass the Senate.
The Keiter team will continue to monitor this and other tax legislation and provide timely updates so you can plan proactively. Contact your Opportunity Advisor if you have any questions or Email | Call: 804.747.0000
About the Author
Jim Chinn, CPA, Tax Senior Manager
Jim is a Senior Manager in Keiter’s Tax Department. For the last 4 years, Jim has worked predominately with clients in the medical and dental industry where he provided tax planning and compliance services related to practice acquisitions and transitions. He is the leader of Keiter’s Healthcare and Medical Practices team. Jim strives to add value to his client relationships by being a trusted advisor. Keep up-to-date with Jim’s thought leadership on our blog.
More Insights from Jim ChinnThe information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
