Cannabis has been a popular area for investing and building new businesses, although some have not yet begun to bloom. For a good government cause. Not the Drug Enforcement Agency, but the Internal Revenue Service.
If you are thinking of investing in the cannabis industry, here are some Totally Necessary Downer News From National Taxpayer Advocacy in the IRS.
The problem is that “the Controlled Substances Act (CSA) makes it illegal under federal law to manufacture, distribute, or distribute marijuana, which is classified as a ‘Schedule I’ controlled substance,” even though states substance has been reduced. (and anyway, Even CBD Can Be Legally ProblematicAccording to the FDA.)
And now, the problem:
Whereas businesses can generally deduct all ordinary and necessary expenses paid or incurred during the taxable year from their gross income. [the] Trade or business as per section 162(a), there are exceptions. Section 280E, enacted in 1982, forbids businesses from deducting expenses from their gross income if the business involves illegally ‘smuggling’ in Schedule I or II controlled substances. Because marijuana is still classified as a Schedule I controlled substance under federal law, all cannabis businesses fall under the category of drug trafficking and are otherwise prohibited from writing off lawful business expenses. (Similarly, because marijuana is not a federally recognized course of medical treatment, individual taxpayers are prohibited from claiming related expenses as itemized deductions on Schedule A of their Form 1040 tax return.)”
While tax law allows deduction of the cost of goods, even for a controlled substance, other costs—rent, utilities, wages, legal bills, advertising, and so on—may not. The company is taxed on gross profit and may lose money after tax bill. Here’s a theoretical example from the IRS:
“A marijuana retailer’s gross revenue is $1,000,000. It spent $750,000 on COGS and $200,000 in business expenses (which are non-deductible according to Section 280E). Assuming a 30 percent effective tax rate, the marijuana retailer’s tax rate is $750,000. has a federal tax burden of $75,000 ($250,000 taxable income x 0.30). If the business had been allowed to deduct the other $200,000 in business expenses, its tax burden would increase to $15,000 ($50,000 taxable income x 0.30). would decrease.”
Now, in this example, only $50,000 is left after cost of goods (COGS) and other business expenses ($750,000 plus $200,000 being $950,000). But the federal tax owed (not including payroll, state, or local taxes) is $75,000. company is red From $25,000.
Let’s say you wanted to invest in a public cannabis company that was smuggling a controlled substance. What are the real benefits? You would have to go into the financials and check whether the tax provisions were correct. Try taking gross profit after cost of goods and then comparing it to operating expenses, and then pre-tax, to see what’s going on.
Large corporations can afford to buy parts of cannabis companies and potentially long-term losses as a way to hedge against the possibility that, perhaps, Congress may one day remove ingredients from the controlled substances list. can remove. Given the current dynamics of politics, this seems impossible, but, nevertheless, they can wait.
But for a regular investor it becomes an issue. What will the stock market bear? Can you expect prices to continue rising so that you see a return on your investment? Or will companies continue to face lax tax regimes?
That’s only on the stock side. Then there are those who want to start a business, maybe start a dispensary or, possibly, put their green thumbs with fertilizer and grow lights, to work and grow crops. This becomes a real problem.
The inability to deduct ordinary business expenses is a crush. Even if the numbers work out to allow for some slim margin of profit, it can take a long time to see payoffs for all the investments needed to get started.
So, before putting money into a pot farm or dispensary, whether through stocks or through your own work, go through the numbers with an accountant, determine how much money will go into taxes, and then see if How wise is it to invest in your nest egg?
Credit: www.forbes.com /