Election day was yesterday (I hope you voted) and so we thought it would be a good time to go over The Marijuana Freedom and Opportunity Act and what it would mean for cannabis accountants.
In late June, Senator Chuck Schumer (D-NY) introduced new legislation to decriminalize marijuana at the federal level. The Marijuana Freedom and Opportunity Act removes marijuana from the list of scheduled substances under the Controlled Substances Act, which would allow cannabis businesses to operate as any normal business. Marijuana, according to the federal government, is still classified as a Schedule 1 drug.
Perhaps the biggest impact this decriminalization bill would have on cannabis business owners is that IRS Code 280E (which forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule 1 or II substances) would not apply anymore. It would allow states to handle marijuana possession and make decisions accordingly.
And it would change everything – for both CPAs and their clients.
A Brief Look At The Bill
Aside from descheduling marijuana as a scheduled substance, here’s a rundown of what the Marijuana Freedom and Opportunity Act proposes to do:
Respect States Rights: Federal law enforcement would still have authority to prevent marijuana trafficking from states that have legalized marijuana to those that have not;
Level the Economic Playing Field: New dedicated funding streams would be established and administered by the Small Business Administration (SBA) for women and minority-owned marijuana businesses that would be determined on a reasonable estimate of the total amount of revenue generated by the marijuana industry;
Ensure Public Safety: The legislation would authorize $250 million over five years for targeted investments in highway safety research to ensure federal agencies have the resources they need to assess the pitfalls of driving under the influence of THC and develop technology to reliably measure impairment;
Invest in Public Health: An investment of $500 million across five years would be made for the Secretary of Health and Human Services to work in close coordination with the Director of National Institutes of Health (NIH) and the Commissioner of Food and Drug Administration (FDA) in order to better understand the impact of marijuana, including the effects of THC on the human brain and the efficacy of marijuana as a treatment for specific ailments;
Protect Children: The legislation would maintain the Department of Treasury’s authority to regulate marijuana advertising in the same way it does tobacco advertising to ensure the marijuana businesses aren’t allowed to target children in their advertisements. The bill also allows the agency to impose penalties in the case of violations;
Incentive sealing and Expungement programs: The legislation authorizes grant programs to encourage state and local governments to administer, adopt, or enhance expungement or sealing programs for marijuana possession convictions. The bill provides $100 million over five years to the DOJ to carry out this purpose.
The Marijuana Freedom and Opportunity Act is co-sponsored by Sens. Bernie Sanders (I-Vt.), Tim Kaine (D-Va.) and Tammy Duckworth (D-Ill). The bill is endorsed by: NORML, Drug Policy Alliance, and the Center for American Progress.
What This Means for CPAs
For CPAs and their cannabusiness clients this opens many doors. Banks will allow cannabusinesses to have bank accounts and credit cards, which will make every day business transactions easier and more efficient. Managing less cash on a daily basis will allow for a significant time-savings for both the accountant and the cannabusiness owner.
But what really happens is that cannabis becomes a normal industry in the eyes of the federal government. Since 280E will no longer be relevant, we can start applying new tax provisions to the cannabis industry. For example, right now, we cannot apply IRS Section 263 Cap A rules to cannabis clients, we have to go back to full absorption costing rules that were in place in 1982 when 280E was enacted. Bonus depreciation becomes an issue in our current world because it’s a provision that is post 1982. Absent entity structuring where you are parsing out all of your real estate and equipment, etc., it’s in its own legal entity such that it is not in operation or cannabis touching entity, you are still limited on that depreciation you can take.
Federal legalization means there are a whole host of new items that we should be taking advantage of on behalf of our clients such as the R&D tax credit, which is a huge opportunity for operators. We will have our entire tool kit available to us to assist our clients but as it stands right now, we are very limited, and CPAs must know how to navigate 280E, first and foremost, in order to be of any benefit to their clients.
When the federal government does legalize cannabis, it will provide opportunities for other CPAs to come into the industry. Many CPAs are risk avoidant and though the American Institute of Certified Public Accountants has provided some guidance and resources for those accounting professionals who want to work in the cannabis industry (they have yet to issue a formal opinion about cannabis) – mostly the organization leaves it to the state accountancy boards. As of January 2018, 12 state boards (Arizona, Arkansas, Colorado, Connecticut, Florida, Maryland, Massachusetts, Michigan, New Mexico, Nevada, Oregon and Washington) have issued official guidance for licensees in their state who wish to offer services to businesses in the marijuana industry.
Support Federal Legalization of Cannabis
Moving forward, the accounting community – especially those who work with cannabis clients – should be supportive of Schumer’s bill. We are stakeholders in the industry and as a group, should be lobbying together and talking to our respective representatives to get this bill passed.
Aside from that, we need to be talking with our clients about the impact of legalization at the federal level and why it is crucial we support every effort to get there. As CPAs, we are in a pivotal position to be proponents of this – to educate and inform those who may have misconceptions or judgements about cannabis as a whole, and the benefits this powerful plant provides to many people. Those of us who have been working with operators know what the issues are and the limitations they face – so we can be the biggest cheerleaders from the financial side to ensure cannabis gets legalized once and for all.