Nearly 75% of cannabis businesses operate at a loss, and many in the industry point to a feature of the Internal Revenue Code as the reason why. Cannabis companies are prohibited from deducting ordinary business expenses—like rent or payroll—from their federal taxes as long as marijuana remains under the most restrictive portion of the Controlled Substances Act.
That could change if marijuana is moved from Schedule I to Schedule III of the act, as the Biden administration has proposed. But in the meantime, 22 states plus Washington, D.C., have allowed medical or recreational cannabis businesses to take some deductions on their state returns, by decoupling their tax codes from Section 280E of the Internal Revenue Code, which imposes the federal ban. Pennsylvania was the most recent to make that change with a state budget adopted last month.
Understanding Lease in Cannabis Industry
One of the significant challenges for cannabis businesses is navigating the complexities of leases. Lease definition varies depending on state regulations, but generally, a lease is a contractual agreement where one party (the lessee) pays the other party (the lessor) for the use of an asset. In the cannabis industry, this often means leasing retail space, cultivation facilities, or equipment.
What is a lease in this context? It’s more than just a rental agreement; it’s a strategic decision that can impact a company’s financial health. Given that cannabis businesses cannot deduct rent from their federal taxes, understanding lease meaning and structuring leases effectively becomes crucial.
For instance, some businesses opt for triple net leases, where they pay for property taxes, insurance, and maintenance in addition to rent. Others might negotiate for shorter lease terms to maintain flexibility in an ever-changing regulatory landscape. The right lease can make a significant difference in managing costs and staying compliant with state and federal laws.
In this episode of Talking Tax, Bloomberg Tax reporters Angélica Serrano-Román and Owen Racer delve into how states are increasingly decoupling their tax from 280E at the state level. This move allows cannabis businesses to take advantage of deductions that are otherwise unavailable at the federal level, providing much-needed financial relief.
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