By Selvan Boominathan, JD, LLM
The Tax Cuts and Jobs Act (TCJA) has become the law of the land, and yet, still no relief for cannabis businesses from Section 280E. As we wrote in an earlier post, there are still significant tax reductions available to cannabis taxpayers, if you know where to look. This post will update each of the three areas we highlighted earlier to identify those opportunities.
TAX RATE REDUCTIONS AND DEDUCTIONS/CREDITS
TCJA reduces overall tax rates starting for this year, 2018. The corporate tax rate is now a flat 21%, and the individual/non-corporate rate now ranges from 10% - 37%. The brackets that can enjoy the lower rates are also now generally expanded compared to prior law. These ate reductions are, however, accompanied by the elimination of many deductions (such as the domestic production activities deduction under former Section 199). The TCJA also added a new 20% deduction for “qualified business income” (“QBI”) for business conducted in the U.S., though only available for Schedule C or E income.
Because of Section 280E, plant-touching cannabis businesses are not eligible for the new deduction, but on the other hand are not affected by the elimination of other deductions such as Section 199. The slightly lower rates though could help take some of the sting out of 280E.
Non-pant-touching cannabis businesses will likely be affected by the changes. The QBI deduction will probably more than make up for any lost deductions (such as the 199 deduction), but this will depend on each business’s tax situation. Fortunately, and worth noting, the TCJA retained the credit for research and development activities.
CAPITAL ASSET INCENTIVES
As we discussed in a prior post, the TCJA grants a 100% immediate deduction for certain capital expenditures (“bonus depreciation”), which is a tremendous benefit for non-plant-touching/non-280E cannabis businesses that have fixed asset expenditures.
Plant-touching cannabis businesses can only recover depreciation to the extent that it is “cost of goods sold” type depreciation, due to 280E. The inventory tax regulations may require depreciation to be computed in accordance with Generally Accepted Accounting Principles. With the full write-off for capital expenditures, GAAP is even less likely to allow the bonus depreciation.
MORE CASH METHOD
As expected, the TCJA greatly expanded the allowance for taxpayers to use the cash method. Now, a C-corporation or a partnership with a C-corporation owner can use the cash method if it has average annual gross receipts of $25 million or less. This is a 5-fold increase from the prior $5 million limit.
The TCJA also allows businesses that pass the $25 million test to not account for inventory, and to use alternative means to deduct inventory costs. Although this should be a tax simplification for most folks, plant-touching cannabis businesses. however, as we explained in a prior post, will need to keep inventory, since that is the only deduction allowed under 280E.
As before, we expect a lot of positive changes from TCJA. Each business should carefully analyze their tax situation to see how the new law affects them. The new QBI deduction, lower rates across the board, and capital expenditure incentives should all positively impact cannabis businesses and the industry at large.