As Connecticut nears the one-year anniversary for retail sales for recreational cannabis, lenders and tax advisors are predicting a number of companies could end up in receivership — despite a new Connecticut law meant to help those entrepreneurs survive an IRS wrinkle that would chew up any slim profits they are making.
On Wednesday, the Connecticut Cannabis Chamber of Commerce held an industry conference in Hartford, with plans to have Mohegan Sun sponsor another next February. Entering December, there were more than two dozen dispensaries in Connecticut for recreational cannabis, and another three that sell marijuana for medical use only. More are opening, and other companies aim to make cannabis-based edibles and other products available for retail sale.
Lenders and tax advisors gave a bleak outlook for the industry at the Hartford event, however, even as Congress and states scramble to ease some of the tax and financial pinches for dispensaries nationally. The industry remains gripped in a hangover of over-supply in 2020 and 2021 that depressed prices, which while up this year nationally have yet to rebound to prior levels, according to the Stamford-based market researcher Cannabis Benchmarks.
“You’re in a trough and you’re going to see a lot of businesses go under — but then you’re going to see a lot of people get their business in order, they’re going to focus on operations and they are going to come out of this thing,” said Marc Claybon, a cannabis industry accounting expert with Crowe, speaking in Hartford on Wednesday. “I also see a middle ground, which is very positive, as you’re seeing groups of people get together. They are buying assets with management teams that have really struggled, but they are great assets and locations. We are seeing some really great regional players come out of this mix.”
Under section 280E of the Internal Revenue Code, strict controls remain on marijuana as a controlled substance under federal law, restricting cannabis businesses from deducting expenses that other small businesses can take. In June, Gov. Ned Lamont signed off on legislation that authorized cannabis licensees to deduct business expenses from their state tax calculations, as a way to offset the IRS tab.
Last month, New York Gov. Kathy Hochul signed a similar law that allows cannabis businesses in New York City to deduct business expenses from their local taxes, while making the law retroactive to January 2022. Cannabis businesses outside New York City had already been allowed to deduct those expenses under an existing New York law.
New York and New Jersey are among a half-dozen states urging President Biden to make marijuana a “schedule three” substance, which would allow cannabis businesses nationally to get the IRS tax deductions that other small businesses enjoy.
Massachusetts has had a state tax deduction on the books since 2022, but that has not been enough to save a number of cannabis businesses there, according to Ryan Handelman, director of cannabis banking for Berkshire Bank and a member of the National Cannabis Industry Association’s banking committee. Handelman told the Hartford audience on Wednesday that more than 15 Bay State businesses have gone under, and he expected the trend to continue next year.
“About a quarter of them are profitable,” Handelman said. “From a lending perspective, that’s not very attractive. There’s a reason that there are so few banks lending in this space.”
Congress has been considering passage of the Secure and Fair Enforcement Regulation Banking Act, with SAFER Banking designed to better protect banks that lend money in the sector, with the goal of drawing a bigger pool of lenders. Also under consideration is a bill that would allow cannabis businesses to apply for loans backed by the federal Small Business Administration, with SBA loans protecting the majority of the principal extended by banks.
Some lenders are choosing to shutter their cannabis lending practices in the interim, however, including Freedom Credit Union in Springfield, Mass.
“I’ve seen multiple financial institutions enter this arena only to exit, because it’s not easy — it’s not easy, just like building a cannabis business,” said Susan Crum, a business development officer for Freedom focused on cannabis lending. “If I could wave a magic wand, businesses that cultivate, process and retail this magical plant would be treated just like any other business.”
For states like Connecticut that have resorted to tax breaks as a lifeline for their cannabis businesses, Claybon said that is impacting revenue the states had been counting on in their original budgeting. And he cautioned that as more states legalize cannabis, the possibility exists of a federal excise tax which could wipe out any benefits companies are getting today from tax breaks in their individual states.
“What’s been floated out there by some Congress people is something that ramps up to a 25 percent excise tax,” Claybon said. “You’re not going to be able to pass all that off on your customers.”
Claybon said that coast-to-coast, people are in the industry because they are passionate about it, with many having a story of personal relevance of how cannabis affected them positively, or did so for someone they are close to.
“It may be, ‘I’m just fascinated with a new industry and I missed the dotcom boom, and it’s 20 years later and I want to be part of it,'” Claybon said. “Others had a family member or something — the stories go on and on. Take the time to get to know the people and their background and their stories, and you’ll find you have a lot in common.”
You can view the whole article at this link.
