Effective Tax Rate on Cannabis Companies ‘Can Be Fatal’; Proposed Bill Would Offer Relief

One of the greatest challenges for states post-recreational cannabis legalization is striking a balance between taxation of these businesses and creating an inhospitable environment. The primary quandary still centers around its federal illegality, cutting off businesses from otherwise accessible deductions and resulting in effective tax rates up to four times the corporate tax rate of 21%.

According to Partner Bob Lickwar, cannabis companies are limited to deducting the costs of goods. For cultivators, this means being able to deduct the costs of growing marijuana, such as fertilizer and the salaries of employees who cultivate the crops. “But if you are a retailer, your deduction is going to be limited only to what you pay for the item that you’re eventually going to resell, so your facility costs like your rent and the employees running the cash register and selling the product aren’t going to be deductible expenses,” he said.

It is a harsh blow to cannabis retailers, as they are unable to deduct about 45% of the business expenses allowable under federal law, Lickwar said, because they are technically selling an illegal product. He noted some businesses may be able to reduce their effective tax rate by organizing as a C-corp entity.

In addition, some states have “decoupled” from the federal prohibition, allowing cannabis companies to deduct business expenses from their state taxes, Lickwar said. However, Connecticut is not among those states, so the federal law applies.

Read the full article published by the Hartford Business Journal.