In a historic measure, President Trump kept his word and signed the Tax Reform and Jobs Act into law just days ago. The Senate and House came to a true compromise with their individual tax reform bills and the outcome, on a cursory review, looks to offer relief to many sectors. With a beneficiary spread ranging from big business looking to reduce taxes by hundreds of thousands down to single parents who now see a standard deduction and child income tax credit twice what it was previously, there is much to be pleased with regarding the passage.
What do all these regulations mean for the cannabis industry? There was an valiant effort put forth to directly benefit cannabis in preliminary sessions. While there may not be any specific amendments addressing the industry; dispensary owners and cannabis investors are wise to dig a little deeper to see how the reform can potentially benefit them.
SALT cap means higher taxes for local and state authorities; will they now reconsider cannabis?
Certain states will see taxes increase by 7-8% through the new cap of $10,000 for the State and Local Tax deduction (SALT). If this change bares its troublesome teeth in local treasuries, it may warrant review and reconsideration of tax revenue from legalized cannabis as a suitable replacement. Neighbor state dispensaries with adult recreational sales should continue to plan for steady “tourist” traffic (even if that tourist is driving back to their home state that night) and investors should start considering states burdened by the cap of the SALT deduction as good places to stake claims in potential new marijuana market activity.
SA 1609 fails to make the cut – but 280E reform still on the table
Unfortunately, the original Senate proposed amendment tacked on to the bill – SA 1609 which was particularly beneficial for dispensary owners, it failed to make the final inclusion. This amendment would have removed the 280E restriction for cannabis businesses in good standing, allowing them to deduct standard business expenses such as payroll and rent, thus lowering their tax rate.
The original law was constructed to prevent drug lords from writing off huge personal expenses. Nowadays, however, this tax law cripples smaller scale operations trying to compete in the space.
A 280E amendment would allow new entrepreneurs to finally enter with a normal tax bracket of 15-30%, rather than the crippling current 60%+ taxes cannabis retailers have been stymied into paying.
Currently, there are two standalone bills regarding the 280E exception for cannabis industry operations in the House and Senate presently, so while the initial effort fell short, the topic is still being actively addressed in both houses.
Business owners will see a boost
Business owners in all spaces, not solely retail cannabis, may take advantage of a beneficial loophole in the bill
For S-Corps, LLCs and Partnerships only, owners will have an income “pass through” allowing a 20% deduction – leaving solely the balance to pay taxes on the balance. This does not apply to income issued as a salary to the business owners, which will have to be paid as usual like any American with a job.
In an economy dominated by retail giants like Amazon and Walmart, this particular pass through is promising as it might spark the fire for small start-ups and dreamers to take a chance on an idea that may have otherwise been economically unfeasible. Cannabis consumers might be looking forward to more variety of delectable edibles, topicals, extracts and tinctures as this are generally smaller scale operations. Now what a treat that would be.
Those giants, however, are the biggest gainers as the corporate tax rate is now reduced down to 21% from 35%. This means annualized tax savings in the millions for major corporations. In a perfect world of tricke-down economics, the principal concept to the new tax structure, these tax savings would be passed onto the consumer in the form of lower prices since overhead in significantly lower. As with Reagan era economic policy aka Reaganomics, there is already a huge outcry of injustice as the lower class will likely never see a drop from that trickle.