So…You Want to Start a Cannabis Company
Imagine: The state you live in now legally recognizes the recreational use of marijuana, and you’re eager to start a business that capitalizes on the law change. As an intelligent entrepreneur, you recognize that sound legal, business, financial, and tax advice are integral to your company’s success, so you seek out input from trusted advisors. Your jaw hits the floor when your attorney tells you that, depending on how your business operates, you may end up paying a substantial amount more in federal income taxes than you otherwise would if your business were not a cannabis-related concern. You wonder, “Why does it make a difference?”
Cannabis Laws Differ at the State and Federal Levels
Though it may be legal in your state, cannabis is still considered illegal by the federal government. As a result, cannabis companies aren’t eligible to claim the federal tax credits or deductions available to other types of businesses. This is outlined in Section 280E of the Internal Revenue Code, which states that:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such
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On Monday, a six-person committee of Massachusetts House and Senate members completed work on a legislative compromise (Bill H.3818) that seeks to overhaul laws regarding cannabis approved by voters in last November’s election.
Local cannabis supporters have criticized the legislation, primarily because it proposes an 8% tax increase on adult-use marijuana.
Below are some of the salient points of the bill:
- The tax rate on retail cannabis will be 20%, representing a significant jump from the 12% that voters approved last fall. Despite the hike, proponents of the bill, including Governor Charlie Baker, argue that the higher rate is commensurate with, if not lower than, those in other states where recreational use is legal – for comparison, Oregon, Colorado, and Washington tax recreational cannabis at 20%, 27.9%, and 37%, respectively.
- The ability of cities and towns to determine whether to permit marijuana businesses will vary by municipality. Specifically, those cities and towns that voted in favor of legalization (comprising roughly 72% of the state’s population) will be able to make the decision to ban or limit marijuana establishments by referendum; for those that opposed, elected officials alone will make the final call.
- Under the new legislation, the rules, regulations,
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In 2013, the principal of a small, private equity fund client asked us what we knew about the world of medical marijuana. He was acting on behalf of a group that had, at the time, recently obtained one of three such licenses issued by the State of Rhode Island, and that needed help navigating the complexities inherent to the nascent cannabis industry. Leveraging our corporate expertise, we assisted in documenting the capital raise necessary for both the build-out of a cultivation facility and construction of a kitchen. That engagement marked our initial foray into the world of legalized marijuana commerce…
Since then, the industry has exploded.
Per Arcview Market Research, marijuana sales are expected to exceed $20 billion in North America by 2021, excluding revenues generated from ancillary cannabis businesses. Eight states – including the Commonwealth of Massachusetts, in 2016 – have voted in favor of the plant’s legalization for recreational use, and certain states now offer banking options for licensed dispensaries. Last year, there was an IPO for a REIT raising capital to purchase real estate to be leased to cannabis businesses. And throughout the first half of 2017, several bipartisan, cannabis-related bills were introduced in Congress, including … Keep reading