Sep 25, 2023

  • Section 280E of the Internal Revenue Code disallows businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. Once moved to Schedule III, 280E becomes irrelevant for cannabis businesses.
  • A Net Operating Loss (NOL) Carryforward allows businesses incurring losses in one year to deduct them from future years’ profits. Businesses thus are taxed on average profitability, making the tax code more neutral.
  • NOLs can be carried forward indefinitely but limited to 80 percent of taxable income in any one year. However, because of 280E, cannabis companies are unable to carryforward losses for federal tax purposes. Upon re-classification to Schedule III, future pre-tax losses can offset taxable income.  In effect, the “clock starts”.
  • Most states that have legalized cannabis, have decoupled section 280E from the federal tax code. This means that in general, NOL benefits can be realized at the state level regardless of current Schedule 1 classification.
  • We reviewed the 16 Cannabis companies from 2019-2022. Federal lost NOL benefits totaled ~$940M though ~$325M remains available at the state level (we used 7% across the board as the effective state tax rate and assume all states permit NOL carryforwards). 

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