The Tax Reform and Jobs Act of 2017, a.k.a. 'TJRA', made significant changes to the U.S. taxation system, and individuals in the marijuana industry should understand how those changes affect them.
Here are three of the most significant tax issues that may impact your cannabis business under the new tax law:
#1: No Repeal of Section 280E
Although it was considered, Congress chose not to repeal 26 U.S. Code § 280E for budgetary reasons. Cannabis businesses must still pay federal income taxes on their gross profits – and are allowed to deduct only their cost of goods sold. On a positive note, however, the TRJA’s reduction in the corporate tax rate may help.
#2: Reduction in Tax Rate for C Corporations
All C corporations, including those engaged in marijuana-related endeavors, now benefit from a 21% tax rate (down from the previous 35%). The corporate alternative minimum tax has been eliminated. In addition to the tax reduction, C corporations also provide limited liability protection, greater credibility, and other advantages.
#3: New Deduction for Pass-Through Entities
The TRJA provides a new 20% deduction under 26 U.S. Code § 199A to certain S Corporation, partnership, and S corporations. Cannabis companies that are structured as pass-through entities for tax purposes may benefit, but there are a number of limitations including (but not limited to) exclusion of specified service trades and businesses, and income limitations ($157,000 for individual filers and $315,000 for joint filers). Marijuana businesses don’t fall within the purview of service trades and businesses, and there are legal workarounds for the income limitations.
The most relevant obstacle for marijuana-related companies is that this new code section was structured as a deduction, which will be disallowed for cannabusinesses on account of Section 280E. Ancillary cannabis businesses, however, particularly real estate lessors, may stand to benefit from pass-through status, especially if their payroll costs are low.