The evaluation of postponing cannabis legalization considering its advantages and disadvantages

Grinning Like a Cheshire Cat

The ever-evolving landscape of cannabis business has exposed a plethora of challenges stemming from varying legal conditions and federal constraints. Here's the scoop on the tumultuous financial and administrative hurdles faced by companies navigating this complex industry.

The Sting of Section 280E

Section 280E of the U.S. tax code seems to have gotten the best of cannabis businesses by prohibiting deductions on standard expenses like rent, payroll, and marketing due to cannabis's federally illicit status. With that, accountants have been hard at work separating and allocating costs of goods sold, which are deductible, from all other nondeductible expenses to minimize tax liabilities and maintain compliance. This accounting gymnastics has created demand for specialists in this field, with professionals feeling that rescheduling cannabis may offer a glimmer of relief.

From "Heroin" to "Tylenol with Codeine"?

Although rescheduling seems to alleviate some accounting pressures, some legal experts in the cannabis sector argue that a significant part of the law is overlooked by this group. Top cannabis lawyer, Jeffrey Hoffman, advises accountants that transitioning to a Schedule III narcotic status may unleash Big Pharma onto the industry. According to Hoffman, rescheduling will alter the federal treatment of cannabis from "treating like heroin" to "treating like Tylenol with codeine."

"It's the pharmaceutical companies who are allowed to make and sell Tylenol with codeine," said Hoffman. "There's no way the mom-and-pop cannabis operators who are already struggling under the current rules are going to be able to suddenly get a pharmaceutical manufacturing license to produce this stuff."

Hoffman warns that rescheduling could hand over the entire industry to Big Pharma and Big Tech. He predicts that the shift will cause chaos not only for the industry but also within his own career.

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Professional Cannabis Tussles

While every cannabis accountant our website spoke to supports rescheduling due to the troubles caused by 280E, legal experts caution that a substantial portion of the law is being disregarded by the accountants.

Hoffman points out that the alleviation of 280E brought by rescheduling may also pave the way for pharmaceutical companies to take over the industry, upending it in the process. Hoffman suggests ditching terms like rescheduling and descheduling in favor of "unscheduling," meaning "legalize it and sell it like lettuce."

It's not all doom and gloom, however. Tax professionals in the sector disagree with Hoffman, arguing that the pharmaceutical industry has other, more lucrative industries on their radar. Mike Goral, a CPA who heads the cannabis practice at Armanino, asserts that multi-state operators (MSOs) could benefit from rescheduling. MSOs are cannabis companies that oversee cultivation, manufacturing, distribution, and retail within multiple U.S. states. Although federal law prevents cannabis from being shipped across state lines, MSOs must build separate operations within each state where they are licensed.

"I don't think Big Pharma will take over," Goral said. "They're laser-focused on weight loss drugs like Ozempic, which have way more commercial potential. They're not wasting time on cannabis. But big MSOs - they'll get bigger. It's like craft beer versus big breweries. The large MSOs can raise capital and will likely buy up smaller brands in places like Florida or Pennsylvania to expand their offerings."

Goral believes that rescheduling is unavoidable and simply a matter of time before the opportunities start rolling in. This foretells optimism for the future of the industry for Goral and his clients.

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The Persistent Grizzle of 280E

While 280E continues to hinder cannabis accounting, the idea that rescheduling is the solution for repealing 280E is questioned by accountants.

"Maybe it solves 280E, but the flip side is that it's a massive giveaway to the pharmaceutical industry and could completely wipe out the cannabis industry as we know it," Hoffman said. "It wouldn't just be one company. You'd see class actions, multidistrict litigation, injunctions - it would be open season, and all of this could unfold before people in the industry even fully realize what just happened."

Andrew Hunzicker, a CPA and founder of DOPE accountants, however, believes 280E's repeal via rescheduling is inevitable and would serve as an immense catalyst for growth in the cannabis industry. Hunzicker says that, while some investors view cannabis as a quick cash grab, playing the long game—including patience for 280E—is his recommended approach.

"Eventually, 280E is going to go away, and once 280E is gone, cannabis company valuations could jump tremendously overnight," said Hunzicker. "Say you own a dispensary and, for five years, you make nothing or even lose $1 million. Then cannabis goes fully legal, 280E goes away, your cash flow increases, and suddenly, your dispensary goes from being valued at one times sales to four times sales. Are you going to care about the $1 million loss in those first five years? No, and that's typical among startups."

The Cannabis Roller Coaster Rides On

Despite these challenges, the cannabis industry continues to be one of the most capital-intensive and financially complex sectors. Due to these factors, accountants remain confident in the industry's future, regardless of rescheduling.

"I've been a controller and accountant for years, and one thing I've consistently seen is that cannabis is still a cash-heavy business," said Brenda Bader, owner of Gold Leaf Accounting in Missouri. "I don't care how many cards or digital payments are out there; there's still a lot of cash involved, so I don't expect my job to change much at all [if rescheduling happens]. Cannabis businesses will still need someone who knows what they're doing - whether they think they do or not."

The complexity of the cannabis business, affected by varying legal conditions and federal constraints, necessitates the work of a broker to navigate the markets and growth opportunities.
In the face of Section 280E, which restricts deductions on expenses for cannabis businesses, financial specialists are required to engage in intricate accounting practices, such as separating and allocating costs, to minimize taxes and ensure compliance.
The prospect of rescheduling cannabis might alleviate some financial pressures, but it could inadvertently empower pharmaceutical companies to dominate the industry.
Accountants are cautioned not to disregard the implications of rescheduling, as it may lead to Big Pharma taking over the industry, causing chaos and potential legal issues.
Tax professionals in the cannabis sector argue that the pharmaceutical industry is more focused on lucrative sectors like weight loss drugs and will not prioritize cannabis over these markets.
Multi-state operators (MSOs) could potentially benefit from rescheduling, as they could grow larger by acquiring smaller brands in various regions, mimicking the relationship between craft beer and big breweries.
The advancement of finance and science in the cannabis industry involves addressing regulatory and compliance challenges, such as understanding the implications of tariffs and adapting to evolving financial models.
The unscheduling of cannabis, meaning legalizing it like lettuce, could pave the way for increased capital, reduced expenses, and growth in the industry.
For those who view cannabis investing as a quick cash grab, playing the long game and enduring financial challenges like 280E is recommended, as it could lead to significant changes in company valuations.
The cannabis industry continues to be a capital-intensive and financially complex sector, necessitating accountants' expertise in the intricacies of finance, regulatory compliance, and business management.
The rescheduling of cannabis, while offering potential relief of financial hurdles like 280E, could also have unforeseen consequences, such as leading to legal conflicts and the dominance of pharmaceutical companies in the market, and should be approached with caution and vigilance.