The 2021 Cannabis Landscape Continues to Evolve
February 18, 2021
The cannabis landscape experienced significant change last year and is expected to continue evolving in 2021. Eric Altstadter, partner and leader of EisnerAmper’s National Cannabis and Hemp Group, recently hosted a webcast with EisnerAmper senior tax manager Ben Aspir and Joshua Horn, partner at Fox Rothschild LLP. The panelists discussed key legal and regulatory developments for the cannabis industry, income tax implications, and merger and acquisition trends.
There are two proposed pieces of legislation that would benefit the cannabis industry: the Secure and Fair Enforcement (“SAFE”) Banking Act and the Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act. Because there are several states that have state-regulated cannabis programs, the SAFE Banking Act would reduce federal banking restrictions and open banking for deposit and lending practices. The MORE Act provides for the de-scheduling of cannabis in the Controlled Substances Act. It also facilitates the expungement of past cannabis convictions and the taxation of cannabis products at 5% on a federal level, excluding all the taxes charged on a state level to fund criminal and social justice reform projects. Additionally, it would prohibit the denial of federal benefits, such as housing, on the basis of cannabis use or possession of marijuana.
The aforementioned legislation has tax implications, specifically regarding IRC Sec. 280E compliance. Banking has always been one of the biggest obstacles for the cannabis industry, especially given that companies are sometimes unable to obtain a bank account, however, they are still responsible for paying tax. IRC Sec. 280E states that no deduction or credit is allowed for any amount paid or incurred during the taxable year in carrying on a trade or business that consists of trafficking and the controlled substances within the meaning of Schedule 1 (cannabis) and Schedule 2 (other drugs) of the Controlled Substances Act. The law imposes stricter penalties for possession of the higher schedule drugs. Thus, if cannabis were to be rescheduled below Schedule 2, it would allow companies to deduct regular operating expenses and significantly expand the deductions that cannabis companies can deduct, which presently is only cost of goods sold. Therefore, the current effective tax rate for cannabis companies is significantly higher than for other businesses because of IRC Sec. 280E.
As of late, there has been a considerable amount of M&A consolidation in the industry. Cash-positive companies might be looking to buy assets of those that are struggling, companies are organically consolidating, and multi-state operators are looking to expand their footprints. Given the new administration in Washington, there is a better chance of cannabis becoming federally legal. Thus, M&A consolidation will continue to soar and be a difficult trend to navigate.
The State Level
COVID impacted just about every sector, and the cannabis industry was no exception. The pandemic impacted each state, as each governor had the ability to decide which businesses were essential versus non-essential. The pandemic wreaked havoc on mental health causing an uptick in marijuana usage. Most states, other than Massachusetts, considered the recreational adult use of marijuana to be considered essential during the COVID shutdowns, while medical cannabis was deemed essential. Furthermore, as the pandemic devastated the economy and put an enormous strain on state budgets, governors seem to be much more open to the idea of legalization in order to close massive budget shortfalls.
Our team will continue to provide legislative updates as they occur.