'One more way to normalize the industry': Attorney discusses cannabis business tax deductions

The Missouri amendment passed in November legalizing recreational marijuana allows cannabis businesses to claim state tax deductions on business expenses.

Missouri marijuana businesses can now deduct expenses, including marketing and accounting costs, from their taxable income.The amendment only allows businesses to claim deductions on state taxes; federal law prohibits marijuana business expense deductions from federal taxes.

Still, the state’s budding marijuana industry is taking off in its first year. Missouri’s adult-use marijuana sales topped $70 million in February and jumped to over $90 million in March.

Chip Sheppard, who works in cannabis law for Springfield-based law firm Carnahan Evans, spoke with Missouri Business Alert about the tax law changes. The interview has been edited for length and clarity.

Hear more: Chip Sheppard on the Business Brief podcast

Missouri Business Alert: Does this kind of build the marijuana industry’s reputation in a way? Or is there any sort of broader impact on the industry as a whole just by allowing it to deduct these taxes?

Chip Sheppard: To treat the marijuana industry just like any other industry for tax purposes is just one more way to normalize the industry.

MBA: Do you know if these deductions help some marijuana businesses more than other marijuana businesses?

CS: Dispensaries are hurt the worst because, for a cultivation facility, almost all of its expenses are part of the cost of goods sold. So, the gross margin that you end up paying tax on, as a cultivator, is a lot smaller. Your gross profit is a lot smaller than it is for a dispensary because the dispensary has a lot of expenses that are not part of the cost of goods sold. The only thing they can write off really is what they pay a cultivator or manufacturer plus the transportation costs. So dispensary employees are not part of that equation and their utilities are not part of that equation. So they can't deduct any of those expenses. Whereas the cultivation facility can, except for maybe the office and the restroom areas.

MBA: Is there any sort of hesitation by businesses to enter the marijuana field because of these limitations and what they can deduct from federal taxes?

CS: Well, it's certainly a factor in people being willing to apply to get into the industry. It's just one more risk that they're not going to price the product right, or that it'll price the product too high so that the black market isn't hurt enough, and people just stick to buying in the black market because the prices would be too high because of the really onerous federal tax burden.

MBA: Do you have any recommendations for how businesses can better take advantage of these new deductions?

CS: Basically go to a CPA. The other step would be to make sure that you take as much advantage legally as possible of the ability to write off the cost of goods sold. Make sure that you go to a CPA that has a concentrated CPA practice in this industry because that's key for them to understand what can be deducted as part of the cost of goods sold and what cannot.