There are machinations afoot that will ease the significant financial
burden of dispensaries.
I am going to go out on tax limb and guess that most of you have never heard of IRS Section 280E. Well, now you have, so there. Then, you ask—or should—if you are reading this, “What the hell is Section 280E anyway? Do I really care about more information about marijuana?”
OK, got it. But first a bit of reality.
For those of you (certainly not myself) that have recently visited a store displaying a green cross (aka marijuana dispensary), you are or quickly become economically painfully aware that when you pay for your future happiness, you can pay with cash/debit or check (no points on the credit card here). Then to make the experience worse, they add a whole bunch of California imposed taxes. Sometimes, it seems the total taxes are more than what you pay for gas taxes. Just remember that old bumper stick; “Gas, Grass or Ass, No One Rides for Free.”
“Vote for Nixon in ’72!”
Back in the Nixon era, the current “Schedule” of controlled substances was created along with the DEA (Drug Enforcement Agency). Despite written evidence to the contrary, President Nixon forced marijuana to be classified as a Schedule 1 drug (guess he watched the 1936 Reefer Madness movie one too many times). Section 1 includes heroin and LSD. The basic definition is: The drug or other substance has a high potential for abuse. The drug or other substance has no currently accepted medical treatment use in the U.S. The drug has a lack of accepted safety for use under medical supervision.
Basic Accounting: Boring But Necessary For This Blog
The simple format for a profit and loss is gross receipts minus cost of goods sold = gross profit. From gross profit you subtract your general and administrative costs which results in net profit. However, if your main product you sell is marijuana, then all you get to deduct is cost of goods sold and therefore you pay taxes on gross profit. This, unlike a regular business that pays taxes of net income.
The Times They Are A-Changin’ (Bob Dylan)
Under consideration of the DEA is to move marijuana from a Schedule 1 to a Schedule 3 drug. Should this happen, a whole new world will open for this industry, including banking and other ancillary businesses involved in the retail and wholesale end of marijuana. Now, these businesses will be subject to certain tax breaks and the tax rate, for legal marijuana dispensaries, will drop from 70% to normal rates.
Unintended Happy Accident
What is most critical is the timing of the change in tax classification. As current Schedule I businesses, the enterprise value of most cannabis businesses is artificially depressed given the significant financial burden imposed by Section 280E. With the (proposed) change in regulatory scheduling goes a corresponding change in enterprise value. In other words, as the profitability of a cannabis business increases following rescheduling, so will its corresponding enterprise value. If you would like more information regarding this, visit:
What Marijuana Reclassification Means and the Effects of Rescheduling. by Fenit Nirappil
Nirappil, Fenit. “What Marijuana Reclassification Means and the Effects of Rescheduling.” Washington Post, 1 May 2024.
Probably should not send your child to school with last night’s brownies.
The black market includes illegal grow operations, distribution, and unlicensed dispensaries. California Governor Gavin Newsom touted California as the largest legal cannabis market in the world, but licensed cannabis dispensaries are struggling to compete with the black market. With this possible change in DEA policy, this will all change and put legal dispensaries on a level playing field. This is good for the entire industry.
Gary Weiss
Gary is a graduate of the Marshall School of the University of Southern California. He founded and operates a boutique accounting firm dedicated to bringing high - quality tax preparation, tax planning and tax resolution services to individuals, small businesses, small nonprofits, family owned businesses and start-ups, at an extremely affordable price. Visit Gary Weiss CPA.