Do Cannabis Stocks Need Tax Reform More Than Legalization?

Having made the streets safe for Truth, Justice, and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio.

The patchwork, state-by-state legalization of marijuana in the U.S.

People don’t consider their local marijuana dispensary owner to be anything like the guy hauling kilos of cocaine across the ocean in a cigarette boat and evading the Coast Guard.

The offending section of the tax code is Section 280e, which allows a cannabis business to deduct only the expenses directly related to sales of product, and not those associated with carrying on the actual business.

All this means a marijuana company is being taxed on its gross profits rather than operating income, which could make its effective tax rate well more than double a similarly structured business not in the cannabis industry.

While not perfect, it serves as shorthand for investors evaluating a business — and since marijuana companies are not able to deduct any of the listed expenses, they are put at a disadvantage.

All this is why many marijuana companies don’t operate in the U.S.

Even though they’re Canadian companies subject to Canadian taxes, because they operate state-level legal cannabis businesses in the U.S., they are taxed a second time as U.S.

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