Cannabis execs anticipate tax benefits from rescheduling

When the Justice Department and the Drug Enforcement Administration issued an order on April 23 to reschedule medical cannabis as a Schedule III drug, it was a day that modern corporate plugs like Curaleaf and Green Thumb Industries had been waiting for a long while.

“It’s the biggest move by the federal government in 50 years, since the Controlled Substance Act, to acknowledge this product, which they’ve said, if you read it technically, that it’s as bad as heroin,” Green Thumb Industries’ Founder and CEO Ben Kovler told CFO Brew.

“And now they’re saying, ‘Wait a minute, it has medical properties.’ We’ve known for a long, long time it’s a positive product, so it’s good that the federal government is coming along.”

The aspect of rescheduling with arguably the largest implications for both companies is an IRS code called 280E, which prohibits companies from deducting business expenses from income tied to Schedule I (heroin, LSD, or ecstasy, for example) and Schedule II substances (for instance, cocaine, oxycodone, or fentanyl).

Because 280E only applies to the upper two echelons of narcotics, medical marijuana’s rescheduling takes a decent tax burden off makers’ shoulders, given that the devil’s lettuce is now legally on the same level as Tylenol.

“So the tax burden, which may have been 50%, 60% of operating income, could get cut in half,” Kovler said.

Taxes on tokes. Curaleaf CFO Ed Kremer pointed to calculations from cannabis data platform Headset that found eliminating 280E could elicit $1.6 billion to $2.2 billion in incremental after-tax cash flow per year industry-wide.

Kremer said some cannabis companies will choose to reinvest it, while others may use it to de-lever their balance sheets. Curaleaf, the US’s largest cannabis company with a market cap of $2.6 billion, will “be opportunistic if the value is there,” Kremer said, noting the potential for share buybacks and consolidations.

Green Thumb Industries, Kovler said, is focused on its new line of THC-based drinks and on breaking into new markets.

Puff and pass (the bill). But while rescheduling greatly reduces tax liabilities, it doesn’t unlock cannabis companies’ access to capital. Kremer hopes the US Senate will pass the SAFE Banking Act, which Kremer said would help “banking [come] out of the shadows with smaller regional banks, and you could get to things like a JPMorgan and a BofA.”

The April 23 order does not apply to recreational cannabis in adult-use states; that remains in Schedule I. However, according to law firm Scarinci Hollenbeck, the DEA will start a new hearing process on June 29 to weigh the possibility of moving it from Schedule I to Schedule III.

If recreational cannabis is rescheduled, Kovler said the business of cannabis could look more like any other regular ol’ business. Well, except that this one can get you elevated.