What Biden's tax plan would mean for the cannabis industry

President Joe Biden has just dropped the federal budget 2024. The White House boasts that the tax plan will reduce deficit by $3 trillion in the next 10 years. The budget’s tax reforms will have a significant (and potentially negative) impact on the cannabis industry. Today I will discuss a few key tax reforms in the budget and their impact on the cannabis industry. We have written many times about section 280E, but we most recently discussed it here with Hilary Bricken. We regret to say that Biden’s tax plan did not contain any of these provisions. That can has been kicked down again.
Let’s now get to the main points of the tax plan. President Biden plans to increase the corporate tax rate and increase capital gains taxes for certain wealthy individuals. This will make corporations less attractive to the cannabis industry. These provisions will be taken one at a.
Current corporate income tax rate stands at 21 percent. This rate was established by President Donald Trump through the Tax Cuts and Jobs Act. We also noted that it was passed when we reviewed:
The reduction in tax rates is the centerpiece of GOP tax reform. We have already written that the C Corporation is the best choice for determining the legal structure of your cannabis business.
C Corporations pay corporate tax. Dividends are then taxed at 20% to individual shareholders. This “double taxation” discouraged the use C corporations in the past. The Act reduces the C Corporate tax rate from 21% to mitigate double taxation. The new law does not alter the tax rate on dividends.
President Biden’s tax plan proposes a 28 percent increase in corporate income tax. Although President Biden claims this will “Revers[e] Trump Tax Giveaway to Large Corporations”, it will also increase the overall tax rate. This will affect small businesses regardless of what you think about large corporations paying taxes. Even a 7 percent increase in taxes is likely to cause people to abandon corporations as their choice of entity in the cannabis industry.
As mentioned, President Biden also wants to increase capital gains tax for wealthy individuals. Although it is unlikely to have any effect on the average cannabis company, it could limit equity financing from wealthy investors. It is likely to make corporations less attractive as wealthy stockholders would be subject to double taxation.
President Biden’s tax plan also proposes to eliminate like kind exchanges of real estate. Here’s how the IRS currently describes like-kind swaps of real property:
The Internal Revenue Code has long allowed for like-kind exchanges. This is when real property is used for business or held for investment. You are not required to recognize a gain under Internal Revenue Code Section 1131 if you make a similar-kind exchange. If you receive money or property other than like-kind as part of the exchange, then you must recognize the gain up to the amount of the money and property. You can’t recognize a loss.
Section 1031 of the Tax Cuts and Jobs Act applies now only to real property exchanges and not personal or intangible property exchanges.
This proposal comes at a moment when the real estate market is already in crisis. It is unlikely to help. The lack of similar-kind exchanges will result in one less tax benefit if the tax plan is passed. This will have a significant effect on the cannabis industry due to the precarious nature tax policy.
The bottom line is that as long as 280E exists any tax reform that raises taxes will adversely impact the cannabis industry. Although it is important that the federal government do something about 280E, I don’t think that will happen anytime soon. Congressional Republicans are unlikely to approve Biden’s tax plan as it stands, so negotiations are possible.
Stay tuned to the Canna Law Blog to get more information about Biden’s tax plan, and how it will affect the cannabis industry.