To quote Benjamin Franklin, “nothing is certain except death and taxes”. But tax rates and rules are far more unpredictable. As the dust continues to settle from the seismic tax reforms passed under the 2017 Tax Cuts and Jobs Act signed by President Trump, the Biden Administration is already discussing another round of tax reform. The specifics of the Biden proposal became clearer with the May release of the Treasury’s “Greenbook” – a summary of the administration’s tax proposals. (Link).
The Biden Greenbook Proposals
The proposals don’t specifically target cannabis, but they also don’t provide any relief for an industry beleaguered by the one-two punch of the punitive tax on gross income inflicted by Section 280E and an established IRS audit policy that aggressively targets cannabis companies. To put the average cannabis business’ tax burden in perspective, consider that a cannabis company that generates revenue but is unprofitable pre-tax can find itself owing a massive tax bill without the cash-flow to pay!
Under the proposals outlined in the Biden Greenbook, many cannabis businesses (and their owners/investors) would likely see even higher tax bills, due primarily to its proposed increases in the corporate tax rate (21% to 28%), top marginal rates for individuals on ordinary income (37% to 39.6%) and capital gains/dividends (23.8% to 40.8%). To add insult to injury, some reforms (such as the capital gains/dividend rate changes) may apply retroactively to as early as March 2021!
(John Q. Cannabis calculating his federal income taxes)
Still, cannabis investors shouldn’t move to the Cayman Islands just yet. The Greenbook tax reforms are often a “wish list” that serve as a starting point for the legislative process, and it would be unusual for the proposals to pass in their current form. Nevertheless, with Democrats in control of the Presidency, House, and Senate, some form of tax reform is a good bet, though no slam-dunk. Much will depend on whether Senate Majority Leader Chuck Schumer can persuade his entire caucus to use reconciliation to pass tax reform with a simple majority.
The Leaflet’s (Tax-Free) Two Cents
Our informed speculation at this stage is that the retroactivity provisions of Biden’s proposed tax plan are unlikely to make it into the final bill. We also wouldn’t be shocked to see meaningful shifts on both the 39.6% rate and $1 million threshold. A downward shift in the proposed rate and a potential raising of the $1 million threshold could make a big difference for cannabis owners and investors that anticipate certain high value liquidity events, such as the sale of their businesses. Additionally, given the potential political toxicity of imposing taxes at death (even for the wealthy) we wouldn’t be shocked if the proposal to tax transfers on death either fails to pass or is modified to raise the threshold and/or applicable exclusions.
That said, Benjamin Franklin needs to add another certainty to his list – Biden tax reform is quite certain to remain uncertain for at least the next several months. So, Leaflet readers may want to sit tight for now, as the final tax reform bill is likely to depart in significant ways from the proposals in Biden’s Greenbook. In the meantime, the FK tax group is always happy to discuss prudent tax planning steps and considerations that may be appropriate based on your specific circumstances.
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