Rhode Island Governor Dan McKee has put forward a budget proposal that would offer tax relief to cannabis businesses by decoupling state and federal taxes. This would reduce the impact of the IRS code 280E, which prevents cannabis companies from deducting normal business expenses. The governor’s proposal is expected to save cannabis operators millions of dollars in taxes over the next few years.
What is IRS code 280E and how does it affect cannabis businesses?
IRS code 280E is a provision in the federal tax code that disallows deductions and credits for any trade or business that consists of trafficking in controlled substances. Cannabis is still classified as a Schedule I substance under the federal Controlled Substances Act, which means that cannabis businesses are subject to this provision. As a result, cannabis businesses pay taxes on their gross income, not their net income, which can significantly reduce their profitability and competitiveness.
According to the National Cannabis Industry Association, cannabis businesses pay an effective tax rate of 40% to 70%, compared to the average 21% for other businesses. This tax burden can hamper the growth and development of the cannabis industry, as well as discourage new entrants and investors.
How would the governor’s proposal help cannabis businesses?
The governor’s proposal would decouple state and federal taxes for cannabis businesses, meaning that they would be able to deduct their ordinary and necessary business expenses for state tax purposes, regardless of the federal tax code. This would lower their state tax liability and increase their cash flow.
The governor estimates that this tax break would save cannabis businesses $824,642 in the fiscal year 2025 and $1.7 million in the fiscal year 2026. The proposal is part of the governor’s budget plan for the fiscal year 2025, which also includes funding for education, health care, infrastructure, and economic development.
The governor’s proposal is supported by the Cannabis Control Commission (CCC) Chair Kim Ahern, who attended the House Finance Committee meeting last week to address the budget plan. Ahern said that the tax relief would help the cannabis industry thrive and create more jobs and revenue for the state.
How does Rhode Island compare to other states in terms of cannabis taxation?
Rhode Island is not the first state to consider decoupling state and federal taxes for cannabis businesses. At least 10 other states, including Massachusetts and Connecticut, have already done so, according to the governor’s budget document. These states have recognized the unfairness and inefficiency of the federal tax code and have taken steps to support their cannabis industries.
However, some states still follow the federal tax code and impose high taxes on cannabis businesses. For example, California has a combined tax rate of up to 45% for cannabis sales, which includes state and local taxes, as well as the 280E effect. This has made it difficult for legal cannabis businesses to compete with the illicit market, which does not pay any taxes.
What are the prospects for federal tax reform for cannabis businesses?
The ultimate solution for the cannabis industry’s tax woes would be federal legalization or rescheduling of cannabis, which would eliminate the 280E effect altogether. However, this is unlikely to happen anytime soon, as the Biden administration has not shown much enthusiasm for cannabis reform, and the Congress is divided on the issue.
However, there is some hope for federal tax relief for cannabis businesses, as the U.S. Department of Health and Human Services (HHS) has reportedly sent a recommendation to the Drug Enforcement Administration (DEA) to reschedule cannabis from Schedule I to Schedule III. This would allow cannabis businesses to deduct their business expenses, as 280E only applies to Schedule I and II substances. The DEA has the final say on whether to accept or reject the recommendation, and it is not clear when it will make a decision.
Another possible avenue for federal tax relief is the SAFE Banking Act, which would protect banks and financial institutions that serve cannabis businesses from federal prosecution. The bill has passed the House of Representatives and is awaiting action in the Senate. The bill would also allow cannabis businesses to access banking services, such as loans and credit cards, which would reduce their reliance on cash and improve their financial management.
