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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.