Cannabis Archives - MGO CPA | Tax, Audit, and Consulting Services

Your Guide to Navigating the Intoxicating Hemp Market

Key Takeaways:

The intoxicating hemp industry offers exciting opportunities for innovation and revenue growth, but navigating its complex and changing regulatory landscape requires adaptability and strategic planning.
While consumer demand for intoxicating hemp products is surging, businesses face challenges like a changing regulatory environment, banking hurdles, and the need for extensive consumer education.
Success in this evolving market demands a comprehensive strategy addressing compliance, financial management, and risk mitigation to capitalize on opportunities while navigating regulatory changes.
Whether you agree with how these products came to market, many now believe that they will survive the regulatory process in some form, most likely in an environment with state-by-state regulations.

Intoxicating hemp products have had explosive growth but are now facing regulatory and other headwinds, with states like California, Missouri, and New Jersey introducing new regulations to control their sale and distribution. For intoxicating hemp companies, or those considering entering this space, you are navigating a complex landscape that offers both significant opportunities and substantial challenges. In this evolving industry, it is essential to understand the market dynamics, regulatory environment, and how to manage your business effectively.

The Rise of Intoxicating Hemp

Intoxicating hemp products are the result of wording in the 2018 Farm Bill, which created a gray area where alternative cannabinoids — such as Delta-8 THC, Delta-10 THC, HHC, and a host of other compounds — have come into existence.

Since then, due to the ability to access traditional retail channels (including direct-to-consumer) and a lower tax and regulatory burden compared to cannabis, the market for intoxicating hemp products has exploded. These products, which offer consumers a legal alternative to traditional cannabis, have gained popularity in the form of beverage, tinctures, vapes, and other consumables. While this boom presents exciting opportunities, it also introduces a host of challenges for those entering or already operating in the intoxicating hemp industry.

Opportunities in the Intoxicating Hemp Market

The intoxicating hemp industry offers several key opportunities for companies looking to expand or diversify their product lines:

1. Rising Consumer Demand

The demand for intoxicating hemp products has skyrocketed. Products such as Delta-8 THC and Delta-9 THC are increasingly popular due to their similar effects to cannabis while staying within a legal gray area and being more widely available. Gummies and beverages, in particular, have emerged as popular product forms — with beverages providing an appealing alternative as younger generations report decreased alcohol consumption. This creates a growing market for your business to tap into.

Curaleaf, Kiva, Medterra, Wyld, 1906, and Tilray — which just recently launched a lineup of hemp-derived Delta-9 THC mocktails, seltzers, and sparkling drinks in the U.S. — are among the cannabis companies that have already entered the hemp market. In a recent Cannabis Business Times survey, 17% of participants from state-legal cannabis businesses said they are currently growing or selling intoxicating hemp-derived cannabinoid products and 26% said they are considering or would consider growing or selling intoxicating hemp products.

2. New Revenue Streams

For cannabis operators and hemp sellers, the intoxicating hemp market offers a way to diversify revenue streams. If you are already in the cannabis business, adding hemp-derived products can provide a complementary line that broadens your market reach. While regulations continue to evolve, potential remains to sell in more mainstream retail spaces — further increasing revenue opportunities.

3. National Scaling and Partnerships

One of the key advantages of intoxicating hemp is the ability to scale your brand nationally through interstate commerce. Unlike cannabis, which faces strict state-by-state regulations, intoxicating hemp can be legally shipped across state lines. Additionally, forming strategic partnerships with other brands, such as those in the food and beverage industry, can further enhance your product offerings and brand visibility.

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Challenges Facing Intoxicating Hemp Companies

Despite the many opportunities, the intoxicating hemp industry is not without its challenges — including:

1. Regulatory Uncertainty

Perhaps the most significant challenge facing intoxicating hemp businesses is regulatory uncertainty. While the update to the 2018 Farm Bill appears to be deferred, many states have moved to restrict intoxicating hemp derivatives like Delta-8.

For example, New Jersey recently mandated that intoxicating hemp goods fall under the same regulatory system as cannabis. California has implemented emergency regulations, while Missouri’s governor ordered the removal of intoxicating hemp products from the market. Other states, like Louisiana and Connecticut, are implementing new restrictions without outright bans.

This regulatory landscape is likely to continue evolving, with the possibility of stricter federal oversight in the future. Your business model and product offerings need to be flexible enough to adapt to these changes — and the potential uncertainty ahead.

2. Market Saturation and Consumer Confusion

The initial boom in Delta-8 and other intoxicating hemp products has led to market saturation in some regions, increasing competition and potentially driving down profit margins. Adding to this challenge is consumer confusion. Many customers still struggle to differentiate between hemp, cannabis, CBD, and various THC isomers. As a result, educating consumers about products is crucial to building trust and expanding your customer base.

3. Financial Hurdles

While intoxicating hemp companies generally face fewer banking restrictions than cannabis companies, many financial institutions remain hesitant to work with businesses in this space. This can make basic operations challenging — from processing payments to securing loans. You may need to work with specialized financial service providers or explore alternative banking solutions. It is also crucial to maintain meticulous financial records and be prepared for extra scrutiny from financial institutions.

Navigating the Industry’s Complexities

While the intoxicating hemp market offers exciting opportunities for growth and innovation, it also comes with its fair share of challenges. To succeed in this evolving industry, it is crucial to have a comprehensive strategy that addresses compliance, financial management, and risk mitigation. With the right support, you can navigate these complexities and position your business for growth in this fast-growing market.

How We Can Help

Our dedicated Cannabis team understands the unique challenges you face in the intoxicating hemp landscape. We offer a range of services to help guide your efforts — from inventory accounting to tax strategy to help obtaining banking services. Reach out to our team today to learn how we can help you thrive in the intoxicating hemp market.

Are You Ready to Take Advantage of Rescheduling M&A Opportunities?

Key Takeaways:

Rescheduling cannabis could unlock new merger and acquisition opportunities that companies need to strategically prepare for.
Sellers should focus on optimizing financials, tax implications, and valuation to maximize exit outcomes.
Buyers must conduct thorough diligence, structure tax-efficient deals, and plan for post-acquisition integration.

The potential rescheduling of cannabis from Schedule I to Schedule III could open up increased opportunities for mergers and acquisitions (M&A) in the industry. Navigating this new M&A landscape will require strategic preparation.

Whether you are looking to sell your company or acquire new assets and operations, you will need to position your business to properly capitalize on this wave of investment activity. Careful planning is critical to maximizing outcomes.

Preparing for M&A in a Post-Rescheduling World

As you anticipate this regulatory change, it is crucial to prepare for the complexities of the M&A process. Here is how you can position your company to take full advantage of upcoming opportunities.

Exit Strategies: Key Steps for Sellers

1. Books and Records Remediation

To attract investors, your financial records need to be in order. Focus on preparing your financial statements and building a comprehensive data room that investors can easily review. Solid financial reporting will not only boost investor confidence but also help you stand out in the marketplace.

2. Tax Optimization

Understanding the tax implications of a transaction is essential. Structure your deals to minimize tax liabilities and maximize financial outcomes. Engage with tax professionals early in the process to help you achieve the best possible financial results.

3. Audits and Reviews

Depending on the size and nature of the transaction, having audited or reviewed financial statements may be necessary. Even if not required, these statements can increase the likelihood of closing a deal, improve pricing, and reduce the time needed to finalize the transaction.

Acquisition Strategies: Essential Considerations for Buyers

1. Diligence

Conducting thorough diligence is crucial for identifying potential risks associated with an acquisition. This includes financial and tax diligence to uncover any issues that could impact deal terms, pricing, or strategy. Understanding these risks upfront will enable you to make more informed decisions.

2. Structuring

Designing a tax-efficient acquisition structure is key to the transaction’s success and the long-term health of the combined entity. Work with advisors to develop structures that optimize tax outcomes and operational efficiency.

3. Post-Deal Integration

Post-acquisition integration is critical for realizing the anticipated benefits of the deal. Strategic guidance and practical support during this phase will help you optimize both operational and financial performance, leading to a smooth transition and better overall outcomes.

Smart M&A Moves for Buyers and Sellers Alike

1. Quality of Earnings (Q of E) Assessments

A Q of E assessment provides a comprehensive evaluation of a company’s financial performance. For buyers, a Q of E offers valuable insights into the target company’s financial health, facilitating informed decision-making and risk mitigation. For sellers, this detailed analysis helps you identify key negotiation points, leading to better pricing and more favorable deal terms.

2. Strategic Guidance

Both buyers and sellers can benefit from strategic M&A advice tailored to your specific business goals. Engaging with experienced advisors can provide you valuable insights and help you navigate the complex M&A landscape, positioning your company to take full advantage of any opportunities that arise from rescheduling.

How MGO Can Help

With a dedicated Cannabis team and a comprehensive suite of services, MGO is here to help you navigate the complexities of M&A — both now and in a post-rescheduling world. Reach out to our team today for support at every stage of the M&A process.

Are You Ready to Optimize Your Tax Efficiency for Rescheduling?

Key Takeaways:

Cannabis companies face critical tax decisions following the notice of proposed rulemaking to reschedule cannabis.
Areas of consideration include reviewing open and estimated tax years, as well as assessing your current structure and its costs/benefits moving forward
Companies should also prepare for potential M&A opportunities and explore tax credits and incentives that could become available in a post-rescheduling world.

The federal government’s proposal to move cannabis from Schedule I to Schedule III carries significant tax implications beyond the (non-)application of 280E. It’s essential for your business to navigate this new landscape and make informed decisions to optimize your tax position.

Here are four key areas to consider:

1. Reviewing Open and Estimated Tax Years

Now is the time to review prior year tax returns, considering recent court cases and other factors to determine if protective claims or amended returns are warranted and could be beneficial. Evaluating how recent events should impact your 2024 quarterly estimated tax payments and future tax strategies is crucial.

2. Structuring for Post-280E Tax Efficiency

Legal and operating structures designed for a 280E environment may no longer be optimal post-rescheduling. Assess the costs and benefits of maintaining your current structure and explore tax-efficient alternatives to avoid phantom income and simplify transactions between related companies.

3. Navigating M&A Tax Considerations

With merger and acquisition (M&A) activity expected to accelerate, it is crucial to optimize your company’s tax structure for potential transactions. Whether you’re an acquirer or a target, understanding the tax due diligence process and making informed decisions in light of the rescheduling announcement is essential.

4. Leveraging Tax Credits and Incentives

Post-rescheduling, cannabis companies can finally take advantage of federal, state, and local tax credits and incentives previously unavailable. Identifying and qualifying for credits related to research and development, employees, clean energy, and more will be beneficial for your business.

How MGO Can Help You

MGO’s dedicated Cannabis practice has the experience and knowledge to help you navigate the complex tax implications and opportunities of rescheduling. Reach out to our team today.

Are You Ready to Take Advantage of Rescheduling?

Key Takeaways:

The potential rescheduling of cannabis presents an opportunity to reevaluate your company’s tax structure and increase deductions, reduce income, and simplify accounting.
Rescheduling may open up access to previously unavailable tax credits, incentives, and deductions at various government levels.
With anticipated increased investment and cash flow after rescheduling, companies should prepare for potential mergers and acquisitions by seeking support in areas like financial due diligence and post-acquisition planning.

The rescheduling of cannabis from Schedule I to Schedule III will unlock new opportunities for cannabis businesses. Is your company positioned to capitalize?

Tax Restructuring

If your existing operating structure was optimized for Section 280E mitigation, now is the time to evaluate whether it will still be tax-efficient after rescheduling.

MGO’s dedicated cannabis tax team can analyze your current structure and identify opportunities to increase deductions, reduce income, simplify accounting, and eliminate unnecessary tax exposures. We will help you develop a strategy specific to your business needs that aligns with your operational goals and any regulatory considerations.

Tax Credits, Incentives, and Deductions

Rescheduling should open cannabis operators to a world of previously unavailable tax benefits.

Our tax professionals can comprehensively review your business operations to uncover tax credits, incentives, and deductions that you may qualify for at the federal, state, and local levels.

Financial and Internal Control Audits

While rescheduling will eliminate the Section 280E tax burden and attract new investors to the cannabis industry, it could also lead to a new regulatory framework.

Our audit services can provide assurance to investors that your company is effectively managing risks, complying with any regulatory changes, and maintaining transparency.

Mergers and Acquisitions (M&A)

The projected wave of investment and increased cash flow resulting from rescheduling means more M&A should be on the horizon.

If your company is considering an M&A deal (either as a buyer or seller), MGO can support your efforts with structuring, financial & tax due diligence, Quality of Earnings (QoE) assessments, accounting integration, strategic guidance, and post-acquisition planning.

With a dedicated cannabis team and a comprehensive line of services, MGO can help you take full advantage of the benefits made available by rescheduling. Reach out to our team today.

Reverse Sales Tax Audits: Potential Tax Savings for Cannabis Operators

Executive Summary:

Sales and use tax requirements and exemptions vary from jurisdiction to jurisdiction but purchases for cultivation and manufacturing activities are often fully or partially exempt – even for cannabis taxpayers.
A reverse sales and use tax audit is a proactive measure to help your organization identify overpaid sales and used taxes, recover overpayments, and devise strategies to reduce future sales and use tax burdens.

For organizations operating in the cannabis industry, complying with applicable state and local tax authorities is critical to maintaining the business because they are often the same agencies that issue operating licenses. As a result, cannabis operators may find themselves “over-complying” with sales tax rules and neglecting potential savings when it comes to purchase exemptions. Specifically, many states provide agricultural and manufacturing exemptions from sales and use taxes, which you can take advantage of by presenting the appropriate sales tax exemption certificate form to your vendors. And for taxes that have already been paid (and that are still within the statute of limitations), you can submit a claim for refund – through a process that is often referred to as a “reverse audit.”

While the term “audit” might have a negative connotation for business owners, a reverse audit can uncover potential savings. Let’s explore how our State and Local Tax team leverage agricultural and manufacturing exemptions and perform a reverse audit to improve your bottom line.

What are agricultural and manufacturing exemptions to sales and use tax?

Exemptions from sales and use tax may be based on the following:

The type of property being sold,
The identity of the purchaser (such as a non-profit organization or the federal government), or
How the property will be used.

The last category includes agricultural and manufacturing exemptions. These protections are based on the premise that the purchase of certain goods and services used directly in the production process should not be subject to sales and use tax.

States offer these exemptions for any number of reasons: to stimulate growth in these sectors, encourage manufacturers to begin or continue manufacturing operations in their jurisdictions, or keep food prices low for consumers.

The types of transactions exempt from sales and use tax vary by state but generally include:

Supplies and raw materials. Most states exempt raw materials used in manufacturing or agriculture from sales and use taxes as long as the materials are incorporated into or become an ingredient or component part of the manufactured product. Many states also provide sales and use tax breaks for feed used for livestock and seeds, roots, bulbs, small plants and fertilizer planted or applied to land.
Machinery and equipment. Many states exempt machinery or equipment used exclusively for agricultural or manufacturing operations from sales and use taxes. However, limitations on these exemptions are common and vary by state. For example, in California, farm equipment and machinery purchases are only partially exempt from sales tax if the equipment is used exclusively or primarily (50% or more of the time) in producing and harvesting agricultural products.
Fuel and utilities. More than half of states don’t levy sales tax on fuel or utilities used in manufacturing and agriculture, although some states have specific requirements. For example, a state may allow taxpayers to exempt the cost of electricity used in manufacturing if it exceeds 5% of the cost of production.
Packaging materials. Most states do not tax sales of packaging materials for manufactured goods and containers and other items used to package and transport agricultural products. However, some states limit this exemption to nonreturnable packaging, and others limit exceptions to certain types of packaging or packaging materials for specific types of agricultural products.
Pollution control equipment. Many states offer tax breaks for pollution control equipment used to control air or water pollution.
Sales to resellers. All states provide a resale exemption, which exempts sales to retailers or distributors who will resell taxable goods to consumers or other distributors.

These exemptions vary by jurisdiction and are subject to frequent changes, whether from legislative changes or evolving Department of Revenue interpretations. In addition, while a handful of states provide guidance on sales and use tax exemptions for cannabis cultivation, other states have not explicitly addressed whether certain aspects of cannabis cultivation qualify for these exemptions. This makes compliance — and taking advantage of all available exempt transactions — challenging for businesses in the cannabis industry.

What is a reverse sales tax audit?

A reverse sales and use tax audit is a specialized financial examination conducted by a state and local tax professional to identify overpaid taxes and comply with state and local tax laws. Unlike many other types of audits, the goal of a reverse audit isn’t to uncover underpayment of tax liability and levy penalties.

Instead, conducting a reverse audit is designed to uncover overpayments stemming from inaccuracies in tax calculations or overlooking applicable exemptions, including those for agricultural and manufacturing purchases and sales, and then submit claims for refund or credit towards future tax liabilities.

The goal of a reverse audit is not just to identify and recover these overpayments but also to implement strategies to reduce the burden of remitting sales tax in the future. It’s a proactive measure that companies can take to improve their bottom line, ensuring they only pay what is legally due and take full advantage of available tax exemptions.

What does a reverse sales and use audit entail?

The exact process for conducting a reverse sales and use tax audit depends on your unique business needs and attributes. However, it generally requires:

An initial scoping phase to get a sense for how large of a potential claim might exist. This involves gaining an understanding of your business activities and purchasing processes, identifying the location of those activities and the corresponding assets, and sampling your invoices to see how you were charged tax by vendors.
Claim development stage, if it is determined that a material claim is feasible. This entails a detailed review of past tax forms, tax returns, invoices, accruals, and additional information, aimed to uncover instances where the business likely overpaid its sales tax liability. This information must be compiled and workpapers created, not only to calculate the amount of claim but to prove it at a later stage.
Claim submission to the relevant tax authority (-ies) must be completed prior to the end of the open statute of limitations period for the oldest claim refund in the package. Each state will have specific procedures and forms for how the claim must be submitted, and frequently an audit of the claim periods will commence either before or after the claim payment.
Finally, it is best practice to avoid being charged the tax in the first place. So it makes sense to train you staff on how to determine when the company has potentially exempt purchases and what is needed to ensure vendors do not assess the tax.

The lookback period for a reverse sales and use tax audit will vary because the statute of limitations varies from state to state. Many states allow taxpayers to claim refunds of overpaid sales and use taxes for three years, while others have a four-year lookback period. Additionally, the lookback period may be extended if your company is currently undergoing a sales tax audit by a state or local tax authority.

How we can help

Performing a reverse audit can be a powerful tax savings tool for any business with agricultural or manufacturing activities – but especially cannabis operators. Accessing potential tax overpayments can bolster cash flow and fixing the underlying system will improve your bottom line. If you’d like to learn more about whether a reverse state sales tax audit might benefit your organization, call or contact MGO online today. We’re happy to discuss your taxable purchases, potential exemptions, and the overall reverse audit process to see if the potential for money back in your pocket outweighs the time and effort required.

Using Transfer Pricing Strategies to Reduce 280E Tax Exposure

Executive summary

Companies face tax burden challenges related the classification of cannabis as a Schedule I controlled substance and IRC 280E.
To navigate this, companies may be able to utilize vertical integration strategies and incorporate transfer pricing best practices to minimize tax exposure.
A transfer pricing study will help identify and risks or opportunities for improvement.

As the cannabis market continues to grow, in the United States cannabis operators continue to face difficulties related to an excessive tax burden due to IRC 280E. One of the most effective strategies for mitigating tax exposure under 280E has been to leverage the benefits of vertical integration.

Since IRC 280E affects the various verticals differently, some cannabis companies are able to isolate activities within distinct business units and maximize Cost of Goods Sold (COGS) calculation to mitigate the impact of IRC 280E.

The potential downside is two-fold. First, IRS tax court cases have made it clear that isolating business units is not a universal solution. And secondly, if not optimally established and documented, transactions between the business units can be problematic and create issues with the IRS.

This article breaks down the impact of IRC 280E, demonstrates the potential benefits of vertical integration, and describes how a proactive transfer pricing strategy can help you maneuver the specific tax and regulatory considerations that affect the industry.

What IRC 280E means for your tax liability

Section 280E penalizes traffickers of Schedule I or II drugs by prohibiting the deduction of “ordinary and necessary” business expenses after reducing gross receipts by COGS, essentially resulting in your federal income tax liability being calculated based on gross income, not net income. For a cannabis operator, COGS typically consist of the cost of acquiring inventory by purchase or production.

Not only are these cannabis companies facing high federal taxes, but there is now an intense level of scrutiny in both federal and state tax audits on intercompany arrangements.

Impact of vertical integration on IRC 280E calculations

Many cannabis companies have become vertically integrated, i.e., combining production function (i.e., cultivation and manufacturing) of cannabis with retail or resale (i.e., distribution) or sometimes all three. Since Section 280E is directly related to selling or the “trafficking” of cannabis-related products, it has the biggest potential impact on retail operations. This means that if a producer can support a higher selling price to its retailer, the retailer will have more COGS from the producer, and the producer will have more costs to deduct because of the allowance of indirect costs.

The business motivation for vertical integration is to better control the supply chain and the end user’s experience. From a tax perspective, cannabis taxpayers want to dis-integrate activities subject to 280E from those for which a position can be argued that they are non-280E activities, such as management services. The Internal Revenue Service (IRS) uses transfer pricing to challenge such segregation and to make allocations between or among the members of a controlled group.

How a transfer pricing study can help your cannabis business

Whether its receives the recent budget infusion or not, the IRS is likely to conduct more transfer pricing audits of the cannabis industry, compared to other industries. These audits frequently result in much higher tax adjustments and significant penalties. In addition, since several states have had budgetary shortfalls due to COVID-19 and other factors, multistate businesses are more frequently being audited by individual states’ tax authorities. If your business has international or domestic intercompany transactions, you’re facing a difficult and uphill battle amid current local, state, and federal tax regulations. The best defense against an IRS transfer pricing audit is a comprehensive transfer pricing study.

A robust transfer pricing study provides the basis with which a company can refute and push back against federal and state claims that their intercompany transactions have no economic or operational substance. As part of a transfer pricing study we will work with you to identify key classes of intercompany transactions, document the pricing of such transactions and reference comparable benchmark data sets to support qualifying transactions. Where transactions fall outside norms, we will work with you to identify differentiating characteristics and seek other data if available, or recommend policy and pricing changes, along with an assessment of the potential exposure.

Taxpayers with inadequate or out of date transfer pricing policies risk an increased likelihood of controversy and transfer pricing adjustments. Thus, even if you have had a transfer pricing study performed in the past, it is important to have it reviewed and updated.

While a transfer pricing study directly reduces a company’s risk of tax assessments and liabilities resulting from tax audits, they also indirectly reduce execution risk when a company is considering an M&A transaction, a capital raise, or go public transaction.

How MGO can help you integrate transfer pricing for the cannabis industry

MGO’s transfer pricing practice has significant experience with the various transfer pricing concerns of the cannabis industry. We also work closely with our federal and state tax practices to assist many cannabis companies with their specific tax and regulatory considerations, which include:

Section 280E disallowance of ordinary business expense deductions;
Common supply chain concerns for operators, like state restrictions on inventory and separation of cannabis and industrial hemp;
Non-plant-touching structures that operate independently from the 280E-affected business lines; and
Sales and excise taxes specific to the cannabis industry.

To learn more about how we can help support establishing, optimizing, and documenting transfer pricing policies so your business can grow in this dynamic industry, contact us.

New High-Road Cannabis Tax Credit (HRCTC) for California Retailers and Microbusinesses Worth up to $250k Annually

Executive summary

California now has a new tax credit called the High-Road Cannabis Tax Credit (HRCTC) available for eligible cannabis retailers and microbusinesses.
The credit is available for tax years starting after January 1, 2023, through December 31, 2027, and can be applied against current year (and future) income taxes.
To claim it, you must make a “tentative credit reservation.”
Expenditures that qualify include wages for full-time employees; safety-related equipment, training, and services; and workforce development and safety.

While the cannabis industry in California has been struggling on many levels, tax credit relief has come in the form of excise tax changes for distributors and has now arrived for retailers. The High-Road Cannabis Tax Credit is a new tax credit from the California Franchise Tax Board (FTB) available for cannabis retailers or microbusinesses for taxable years beginning January 1, 2023, through December 31, 2027. In order to capitalize on this opportunity, eligible calendar-year taxpayers must make a tentative credit reservation during the month of July to claim the credit on their 2023 CA income tax return.

Who qualifies for the HRCTC

To be eligible, you would need to meet three basic requirements.

Which expenditures qualify for the HRCTC

There are several types of expenditures eligible for the credit with specific parameters that you would need to meet to qualify for them. Qualified expenditures are amounts that you have paid or incurred for any of the following expenses.

Wages for full-time employees

Not every employee has to meet these requirements — but for those that do, their wages count as a qualified expenditure. First, full-time employees must be paid for no less than an average of 35 hours per week — or they must be a salaried employee paid compensation for full-time employment.

In addition, full-time employees must be paid no less than 150% ($23.25) but no more than 350% ($54.25) of the state minimum wage. To meet the 150% minimum wage requirement, you may include the following employee benefits in qualified wages: group health insurance, childcare support, employer contributions to employer-provided retirement plans, or contributions to employer-provided pension benefits. But if you pay employees wages that surpass more than 350% of the state minimum wage, those wages are not considered a qualified expenditure.

Safety-related equipment, training, and services

Expenditures related to safety, training, and providing services can also qualify if they meet the following criteria:

Equipment primarily used by the employees of the cannabis licensee to ensure personal and occupational safety, or the safety of the business’s customers.
Training for nonmanagement employees on workplace hazards. (This includes safety audits, security guards, security cameras, and fire risk mitigation.)

Workforce development and safety

Qualified training for your employees includes:

Joint labor management training programs
Membership in a joint apprenticeship training committee registered by the Division of Apprentice Standards, and a state-recognized “high-road training partnership” (as defined in Section 14005 of the Unemployment Insurance Code).

Available credit

The amount of available credit is equal to 25% of qualified expenditures. The aggregate credit that can be claimed by each taxpayer (as determined on a combined reporting basis) is a maximum of $250,000 per year. Any unused credit can be carried over to the following eight taxable years. Availability is limited as the total cumulative amount of HRCTC available to all taxpayers is $20 million.

To claim the HRCTC on your California tax return, you must reduce any deduction or credit otherwise allowed for any qualified expenditure by the amount of the HRCTC allowed.

How do I make a tentative credit reservation — and when?

You must make a tentative credit reservation (TCR) with the FTB to claim the credit. This reservation must be made online and once you’ve done so, you’ll receive an immediate confirmation. FTB currently reports that the system will be up and running by July 1, 2023, but you can start preparing now.

How we can help

The HRCTC is a valuable tax credit opportunity for any commercial cannabis business operating in California. Determining if you qualify and calculating how much you can save could be complex. Our extensive experience in cannabis, cannabis tax, and state and local tax enables us to help you take advantage of this tax credit so you can stay focused on thriving in this ever-growing, culture-shaping industry.

Reach out to MGO’s State and Local Tax team to find out whether you qualify for this tax credit opportunity and determine how much you could potentially save.

Cannabis 50 Celebrates Women’s History Month

Women’s History Month provides an opportunity to acknowledge the achievements women have made over the course of history. The 4th Annual MGO Cannabis 50 features the stories of several women leaders in the business, philanthropic, and social justice spaces who are helping push the cannabis industry forward. To celebrate Women’s History Month, we are compiling and broadcasting their stories to honor the way they use their voices for change in a growth-oriented industry.

See these stories, quotes, and more in the MGO Cannabis 50.

Garden Society

Though native to California — more specifically, Wine Country — in 2022, Garden Society executed a capital raise that will help it expand its footprint across more of the United States. Amid a historically tight capital market, this company was unafraid to live its diversity ideas and baked a unique set of conditions into its raise. In the end, it secured a $7 million Series A, including an oversubscribed Special Purpose Vehicle comprised of strategic female investors and BIPOC angel investors. With the surge of capital in hand, this female-owned and -led operator plans to lean into its mission of catering to the power women play in educating and driving the acceptance of cannabis It has continued their mission in earnest, already expanding into Ohio and New Jersey.

Christine De La Rosa

As a Latina woman whose company, The People’s Ecosystem’s, leadership is primarily comprised of people of color and women, Christina De La Rosa understands how important it is to challenge stereotypes and speak directly to underserved minority consumers. She’s been tireless in her pursuit of widespread diversity, equity, and inclusion, advocating for BIPOC cannabis representation, as well as more easily accessible capital. The founding and managing member of The People’s Group, founder of The People’s Dao, and The People’s Ecosystem, she also serves on the California Cannabis Advisory Committee and the New York Cannabis Industry Association Special Advisory Group for Social and Economic Equity and Social Justice.

Vangst (Karson Humiston)

Hiring qualified talent has always been difficult in the cannabis industry — especially in tight labor markets like the one in 2022. And Vangst understands the complications that can arise when trying to staff a rapidly growing industry. The Denver-based company matches short-term and full-time workers with job openings at cannabis companies around the country. Vangst focuses on more than simply providing labor; the organization prides itself on building a network, as well as communities, of its employees in the greater scope of the industry. Its annual Cannabis Industry Salary Guide is an essential resource for human capital management. In 2022, it explored new ground and released the LGBTQIA+ Representation in Cannabis Report, leveraging its insights in staffing to show where the industry is improving and where it can close the gaps.

Nancy Whiteman (The Wana Brands Foundation)

When cannabis titan Canopy Growth Corp. acquired Wana Brands for a whopping $297 million, CEO Nancy Whiteman wasted little time in putting those funds to a greater use. With the launch of The Wana Brands Foundation, Whiteman is making a major impact. In November 2022, the Foundation announced its most generous donation yet: $3 million to Johns Hopkins University to conduct extensive research on the therapeutic benefits of cannabis and psychedelics, including for autism. The Wana Brands Foundation also made additional gifts to Out Boulder County’s “We All Belong” campaign; 16 Colorado organizations working to end hunger in their communities; nonprofits focused on social justice, including the Reentry Initiative, Last Prisoner Project, Expunge Colorado, and National Expungement Works; and research and education organization Realm of Caring.

Women entrepreneurs forging a path

While the cannabis industry hasn’t traditionally seen many women leaders getting involved, it’s clear many are now paving the way with a vision for a better future — and the progress they’ve already made is tangible. We work to honor their contributions as we celebrate the entrepreneurs, visionaries, educators, and philanthropists currently making history in cannabis.

Minority disruptors are innovating and changing the cannabis industry with one distinct thing in common: perseverance. While the road to su

Tax Considerations for Financially Distressed Cannabis Companies

Thanks to maturing markets, limited access to capital, and disproportionate tax burdens, many companies in the cannabis industry are facing major challenges in managing their debt and creditors. Without ready access to federal bankruptcy protection, many companies with liquidity challenges are looking at their options. Without careful consideration of the tax consequences of these options, companies may be subject to significant tax traps. Here are several factors to consider to avoid these traps and stay solvent from Tax Partner Barbara Webb.

High cost of debt + high effective tax rate = cash crunch and tough decisions

How did cannabis companies arrive at this decision point? The current cash crunch in the industry has been building for years, precipitated in part by banking regulatory constraints and an abnormally high effective federal tax rate.

As the below chart illustrates, cannabis companies lack access to traditional banking and market rate loans and have turned to alternative, expensive sources of debt financing bearing effective interest rates as high as 20%. In addition, Internal Revenue Code Section 280E essentially taxes the industry on gross margins, such that even a company that would otherwise be in an overall tax loss position may still owe taxes.

Caught in this double bind, even an operationally successful cannabis company may face a difficult choice: service debt timely at the expense of keeping current with taxes, risking tax liens that threaten the license, or pay taxes when due at the price of defaulting on debt and risking the viability of the business overall.

The tax impact of debt restructuring

Restructuring debt is one route for cannabis companies in distress to remain operational, but debt modification carries potential tax traps for the unwary – both borrower and lender. Depending on the relative value of the debt exchanged, the borrower can realize cancellation of debt income. The insolvency exception to recognizing and paying current tax on this income may not be available to a cannabis company, as the fair value of its assets – including intangibles – may still exceed its liabilities. A lender may also experience a taxable event on the refinancing, either in the form of interest income, or gain due to the valuation of equity received in the exchange.

In any debt refinancing situation, both the borrower and the lender should anticipate and plan for complex tax calculations involving debt discounts (I.e., original issue discount, or OID) and the fair value of company equity in order to determine correct tax treatment. To avoid any last-minute surprises or deal delays, both the borrower and the lender should model the tax treatment on both sides.

Sales of distressed assets and the tax impact

Considerations for the borrower:

Are the assets to be sold in a different tax filing entity as the borrower?
Will the flow of cash between entities create a taxable event?

Considerations for the lender:

What is the borrower’s anticipated cash position after paying tax on the sale?
Can cannabis business assets be sold in the jurisdiction’s regulatory environment? Or is a sale restricted to equity?

Assignment of income receipt of equity

If the borrower and the lender agree on a debt workout based on assignment of income, or equity ownership, both parties should understand the borrower’s existing tax structure and the impact the restructuring will have on both sides.

The borrower should assess whether a “change in control” has occurred for tax purposes, as the use of tax attributes may be limited. If an assignment of income is structured as a fee, consider the tax treatment of the payment and deductibility under 280E.

A lender who becomes an owner or part of management should consider:

Depending on how the agreement is structured, the assignment of operating income and participation in management may turn the lender, or the lender’s entity, into a “trafficker” subject to 280E.

The lender should also be cognizant of the borrower’s standing with the taxing authorities and whether the operator can afford both paying down tax liabilities and payments under the terms of the workout. The retention of the cannabis or reseller license that the lender is depending on for cash flow is tied to staying current with state and local taxes. An IRS liability that has progressed to the lien stage unbeknownst to the lender could result in a “sudden” drain of cash from a bank account.

“Workouts” with taxing authorities

Given the current cash crunch in the industry, companies have been known to delay remittance of sales and excise taxes to state and local governments. Companies should be aware that non-payment of these “trustee” taxes can cause a loss of standing to operate legally and carries personal liability for officers and owners of the company. Taxing authorities may have limited sympathy for a distressed taxpayer who falls behind on these types of taxes and taxpayers should pay down any outstanding balances as soon as possible.

If income taxes are past due, it is important to continue to make payments toward the balance on a regular basis. A taxpayer cannot apply for a formal IRS payment plan until a revenue officer is assigned to the case. Also, a taxpayer must usually pay all outstanding taxes that are not overdue and remain “current” on all future taxes in order to establish and remain on an installment agreement. Federal and state revenue officers are generally willing to work with taxpayers in financial distress who act in good faith throughout the process. Engaging a professional representative who understands tax controversy practice and procedure and how to work with revenue officers can make all the difference between establishing a payment plan and facing a tax lien.

How MGO can help

A cannabis company navigating financial distress should engage a tax professional with both industry experience and a high level of tax technical skill to navigate the complex tax impact of a workout or restructuring. MGO’s Cannabis Tax team has both the industry experience and the technical knowledge to assist companies of all sizes during this challenging time.

Cannabis Companies May Have Access to Tax Relief with the Employee Retention Tax Credit

While cannabis companies were unable to participate in most government-provided economic recovery packages in the wake of the COVID-19 pandemic, due to limitations under Section 280E, there may be good news. The Employee Retention Tax Credit (ERTC) does not explicitly exclude cannabis companies from eligibility for the ERTC.

Since Section 280E does not apply to employment payroll taxes because the provision is found in the income tax section of the code, qualifying cannabis companies may be able to capitalize on the credit that rewards employers for keeping their employees on payroll through the pandemic.

What is the ERTC?

Issued as a refund of an employer’s Form 941, the ERTC provides an incentive for those employers who suffered from pandemic-related disruptions and decreased revenues. If a cannabis company continued to pay employees through these challenges, they may be eligible to qualify for ERTC refunds retroactively. The refundable credit can be claimed on qualified wages, including certain health costs paid to employees.

Why was cannabis excluded?

Cannabis companies were unable to qualify for a Paycheck Protection Program (PPP) loan under IRS Section 280E, which prohibits them from deducting ordinary business expenses from gross income for the purpose of income tax. This is because while many states are now proposing and passing legislation to legalize cannabis, the substance is still federally classified as illegal under the Controlled Substances Act (and thus subject to IRS Section 280E).

How do cannabis businesses claim relief?

MGO’s approach to 280E mitigation is based on the idea that the rule only applies to income tax — not payroll tax. And because the ERTC is a payroll tax credit and issued as a refund, cannabis companies previously thought to be ineligible for relief can now claim it if they meet the qualifications:

(1) prove they had a decrease in percentage of gross receipts in calendar quarters during the COVID-19 pandemic when compared to prior quarters, or

(2) that they underwent a full or partial government suspension due to COVID-19 restrictions, like forced closure or quarantine.

The IRS has not yet weighed in on the cannabis issue, so for now, we consider it safe for cannabis companies to act on the opportunity. To determine qualification, a cannabis company will need to provide information like quarterly revenues, payroll tax returns, employee wages, and lines of business on Form 941, the Employer’s Quarterly Federal Tax Return.

Rely on cannabis tax and accounting specialists

All things cannabis tax and finance are complicated and make a major impact on an operator’s bottom line. On top of that, the IRS’ penchant for focusing additional attention on the cannabis industry is well-documented. As a result, cannabis operators should always utilize a cannabis-focused accounting provider that is well-versed in the ins-and-outs of cannabis tax compliance and planning.

MGO is uniquely positioned as a national leader in both tax credit advisory and cannabis accounting and financial best practices. We can help you identify tax credits, file claims, prepare documentation, and ultimately successfully defend your claim.

About the author

Michael Silvio is a partner at MGO. He has more than 25 years of experience in public accounting and tax and has served a variety of public and private businesses in the manufacturing, distribution, pharmaceutical, and biotechnology sectors.