Will a canna tax “hit” happen to us at Congress?

To quote Benjamin Franklin: “Nothing is certain but death and taxes”. But tax rates and rules are far more unpredictable. As the dust settles from the seismic tax reforms passed under the Tax Cuts and Jobs Act signed by President Trump in 2017, the Biden administration is already discussing another round of tax reform. The details of the Biden proposal became clearer with the release of the Treasury Department’s “Green Paper” in May – a summary of the government’s tax proposals. (Shortcut).

The Biden Greenbook Suggestions

The proposals do not specifically target cannabis, but neither do they provide relief to an industry plagued by the double hit of the gross income penalty tax under Section 280E and an established IRS review policy that aggressively targets cannabis companies. To put the tax burden of the average cannabis company in perspective, keep in mind that a cannabis company that generates revenue but is pre-tax unprofitable can owe a massive tax bill without paying the cash flow!

Photo by Hillary Kladke / Getty Images

According to the proposals set out in the Biden Greenbook, many cannabis companies (and their owners / investors) would likely experience even higher tax rates, largely due to the proposed increase in the corporate tax rate (21% to 28%), the top marginal rates for ordinary income individuals (37% to 39%) , 6%) and capital gains / dividends (23.8% to 40.8%). In order to hurt the damage even more, some reforms (such as the changes to the investment income / dividend rate) can apply retrospectively from March 2021!

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Still, cannabis investors shouldn’t move to the Cayman Islands just yet. The Green Book tax reforms are often a “wish list” that serves as a starting point for the legislative process, and it would be unusual for the proposals to be adopted in their current form. Still, with the Democrats in control of the Presidency, House of Representatives, and Senate, some form of tax reform is a good bet, if not a slam dunk. Much will depend on whether the majority leader in the Senate, Chuck Schumer, can convince his entire parliamentary group to pass the tax reform by way of reconciliation with a simple majority.

The (tax-free) two cents of the leaflet

Our informed speculation at this stage is that the retrospective provisions of Biden’s proposed tax plan are unlikely to be included in the final bill. We also wouldn’t be shocked to see significant shifts in both the 39.6% rate and the $ 1 million threshold. Shifting the proposed interest rate down and possibly raising the $ 1 million threshold could make a huge difference for cannabis owners and investors expecting certain high quality liquidity events like the sale of their business. In addition, given the potential political toxicity of collecting taxes on death (even for the wealthy), we would not be shocked if the death tax tax proposal is either not passed or is amended to raise the threshold and / or applicable exclusions.

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However, Benjamin Franklin has one more certainty to add to his list – Biden’s tax reform will almost certainly remain uncertain for at least the next few months. Readers of the brochure should therefore hold back for the time being, as the final draft law on tax reform is likely to deviate significantly from the proposals in Biden’s Greenbook. In the meantime, the FK Steering Group will be happy to discuss prudent tax planning steps and considerations that may be appropriate based on your specific circumstances.

(For more information, contact akrotman@dfmklaw.com).

Rich Trotter is Litigation Counsel at FeuersteinKulick, New York law firm, one of the leading cannabis law firms in the country.

This article originally appeared in Feuerstein Kulick’s monthly cannabis newsletter, The Leaflet, which you can subscribe to here. For more information, contact Rich at rich@dfmklaw.com or (201) 410-4737 or email The Leaflet at theleaflet@dfmklaw.com.