Cannabis MSOs Using Tax Liability Loopholes To Fund Operations, Which Ones Top This Analyst's List?

Federal prohibition makes it difficult for a cannabis business to operate fair and square. Not only is it depriving them from access to the financial system, but it also denies them the right to any U.S. federal income tax deduction for ordinary and necessary business expenses, despite being recognized as a legal business on the state level.

Internal Revenue Code Section 280E puts strict limits on which taxes marijuana businesses can deduct, often forcing them to pay higher effective tax rates than other conventional businesses.

The IRS updated its guidance for cannabis operators in 2020, allowing those businesses the possibility to reduce gross receipts using an accounting method available under Section 471.

That section allows businesses that must gross less than $25 million in revenue to deduct a significant portion of their expenses.

Which MSOs Top The List Of Tax Liability Loophole Users?

Cantor Fitzgerald’s analyst Pablo Zuanic took a closer look in his recent note at how cannabis MSOs are using tax liabilities to access capital to fund their operations at lower rates.

The analyst said that the 280E tax rule is “unfair” and that companies are delaying some of the tax payments doesn’t have to be bad.

“The interest rate” charged by Uncle Sam is well below what most U.S. cannabis companies are paying these days,” he said.

Zuanic analyzed MSOs that dominate the market, their balance sheet strength, cash flow and debt structure, as these factors can significantly affect stock prices.

“We looked at 15 of the larger-sized MSOs in terms of total debt and the amount of money they owe in taxes (both short and long term in nature) to evaluate balance sheet strength and companies that might need to raise cash,” the analyst said.

Zuanic singled out Verano Holdings Corp. VRNO VRNOF and Curaleaf Holdings, Inc. CURA CURLF as the “most active users” of these tax liability loopholes, with $472 million and $500 million, respectively, of their debt coming from taxes payable. In addition, their tax liabilities equal to 52% and 37% of annualized sales, respectively.

Other active users (as % of sales) include:

  • TPCO Holding Corp. GRAM GRAMF, which is doing business as The Parent Company (33%)
  • 4Front Ventures Corp. FFNT FFNTF (31%)
  • Jushi Holdings Inc. JUSH JUSHF (27%)
  • Planet 13 Holdings Inc. PLNHF PLTH (0%)
  • Green Thumb Industries GTBIF + MariMed, Inc MRMD MRMD (both at 9%)
  • Photo: Courtesy of Nicholas Cappello on Unsplash
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Posted In: Analyst ColorCannabisNewsPenny StocksSmall CapMarkets280EanalysisCantor FitzgeraldmarijuanaPablo Zuanicstock
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