Tax law is changing for Missouri cannabis businesses.
On November 8, 2022, Missouri Amendment 3, the Marijuana Legalization Initiative, was approved by voters, extending marijuana from medical use to recreational use.
Reduced Tax Burden for Missouri Businesses
One of the provisions in Amendment 3 allowed Missouri to decouple from the federal regulations regarding Federal Statute 280E. This will ultimately result in significant tax benefits for Missouri cannabis businesses.
The tax law changes bring Missouri taxation for marijuana businesses into parity with other businesses, reducing their tax burden and enabling operators to take tax deductions and credits for business expenses. For example, all expenses that are normal and reasonable in the course of business will now be deductible for cannabis businesses in the state of Missouri. Significant areas include selling and marketing expenses as well as corporate overhead.
It’s important to note that the Federal limitation for Section 280E remains in place, so these tax changes apply to Missouri state taxes only, not federal taxes.
What is 280E?
In 1982, Congress passed Internal Revenue Code (IRC) section 280E in response to a Tax Court case concerning a drug dealer who claimed ordinary and necessary business expenses related to his drug sales.
Section 280E disallows deductions and credits for amounts paid or incurred in the trade or business of trafficking in controlled substances prohibited by federal law or the law of any state where the trade or business is conducted.
Marijuana is listed as a controlled substance on schedule I and II of the Controlled Substance Act. This is why cannabis companies can’t take federal business-related tax deductions, which is a significant competitive disadvantage.
Do What Do Cannabis Operators Need to Know about These Tax Changes?
With adult use now legal and effective on February 6, the expectation is that gross revenues would increase. If, as a marijuana businesses, your current cost structure remains consistent, you should ultimately see more dollars to the bottom line.
In general, Missouri decoupling from the federal regulations regarding Section 280E is good for Missouri licensed marijuana operators.
- You can now operate under a similar tax environment as any other legal business operating in this state.
- From a cash flow perspective, if you have paid estimates throughout the year based upon 280E limitations, you may be getting a significant tax refund.
Impact for Dispensaries
The challenges facing cannabis companies under 280e affect all plant touching entities, but the most pronounced burden is on dispensaries. Why? Because dispensaries have more costs that are considered expenses and not cost of goods. Therefore, dispensaries stand to gain the most from this change at the state level.
If a typical dispensary has $500,000 of expenses that are disallowed because of the provision of 280E at the Federal level, the new legislation will save the dispensary approximately $25,000.
Actions to Take
Now it’s even more important for marijuana businesses to keep track of all expenses and ensure that their accounting practices and systems are robust.
Now that cannabis operators can deduct expenses on Missouri returns, it’s important that businesses can support and justify the validity of those expenses. These accounting procedures should already be in place, but now is a good time to review procedures and ensure employees are compliant.
Finally, be informed of these new tax law change. Be sure you take advantage of these provisions, like any normal business would, when filing income tax returns.
Finally, be aware that the IRS looks closely at cannabis businesses, so ensure your record-keeping is in good shape and ready for scrutiny.
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