Now that the Department of Health and Human Services recommended moving cannabis to schedule 3, the industry is asking what impact a potential reclassification would have on the financial futures of U.S. cannabis companies.
The removal of the tax burden from section 280E of the IRS tax code is expected to be one of the biggest changes. But how big would that effect be?
Mike Regan, director of research at Excelsior Equities, recently spoke with Green Market Report to break down the math.
“Consensus estimates expect about $4.3 billion of total gross profit in 2024 for the public U.S. marijuana companies, so removing 280E taxes would free up about $900 million to pay interest expenses and be reinvested in operations, marketing, and employees,” he said.
By Regan’s analysis, this is not just a break for big cannabis businesses. Instead, it’s the type of restructuring that would make every plant-touching operation more financially healthy and allow them to run more like a normal business.
This interview has been edited for length and clarity.
What was your initial reaction when the news dropped about the HHS’s recommendation?
Regan: I mean, I’d already done the “If this goes away, what happens?” a lot. This is a huge first step towards removing it, (but) remember, nothing’s actually changed, right? The DEA can do whatever they want. It’s not done till it’s done.
My initial thought was the industry has a lot of leverage right now. Not all companies, but some companies have a lot of debt, and if you give back 21% of gross profit, that improves their credit quality. Tax money that, instead of going to the government, can be used to pay interest and debt.
Instantly, companies improve their credit quality very quickly. So, I think that the equity moves are justified. This isn’t just, “Oh, this is a good thing.” You can do the math.
From what I’ve read, we’d essentially go from an effective 80% tax rate to a 20% corporate rate, right? Is that the bottom line here?
Regan: People throw around the effective tax rates, and I don’t like that because it’s mathematically different for everybody, depending on what your SG&A is.
280E is basically an excise tax that is bizarrely applied to gross profit and called an income tax, but it’s not an income tax.
You hear from the smaller private players the most. They’re the ones who lose everything, getting drained of their capital.
Regan: It’s also not, “Oh, they’re just getting this big tax break they shouldn’t get.” No, they’re paying this thing that was used to lock up drug cartels.
And if every other business can decide, “I’d rather hire 10 more people and reduce my taxable income, than not hire them and have higher taxable income that I’d pay to the government.” That’s what normally happens, right?
The government wants you to hire people and invest. And cannabis can’t do that. (Companies) are like, “We lost $100 million last year.” And (the government is) like, “Great, you still owe this $200 million, because that’s 20% of your gross profit.”
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