With Senate Bill 654 signed into law earlier this summer, and with House Bill 1994 to follow shortly, Pennsylvania cannabis companies will no longer be forced to limit their deductions to cost of goods sold as they are federally. Starting with their 2024 tax returns, business owners will be able to deduct ordinary and necessary expenses they were denied on their federal tax return under Section 280E of the tax code.
The Pennsylvania House Committee on Appropriations predicts $2.1 million in tax deductions each for fiscal years 2025 and 2026. Cannabis business owners who are struggling with price compression due to oversupply and a state track-and-trace system that is having problems will surely welcome the savings.
Until now, Pennsylvania had followed states such as Alaska, Arizona, and Nevada, which have legalized cannabis but still follow federal law regarding 280E. Cannabis business owners and their advisers should now begin preparing for year-end.
Companies should assemble adequate expense records, which confirm and support the amounts to be deducted. For some businesses, records that substantiate cost of goods sold may be the only ones properly retained, because these are the only deductions which have been allowed in the past. A strong cash economy has further distanced a number of cannabis companies from quality record-keeping.
In addition to the wholesale cost of cannabis products, most companies should possess reasonable records substantiating rent and payroll, as part of those expenses are usually allocated to cost of goods sold. However, records for expenses such as advertising and marketing, which have been 100% non-deductible, may not exist at all.
Now is the time to locate receipts or obtain fresh copies from vendors. Even a spreadsheet with detailed estimations of expenses is preferable to a back-of-the-envelope guess a few weeks before the tax deadline.
Cannabis companies and their tax preparers also must provide Forms 1099-NEC (or occasionally Form 1099-MISC) to vendors whom the business paid $600 or more during 2024. Exceptions to this rule are money paid to corporations, which don’t receive these forms, and attorneys, who receive Form 1099-MISC for all amounts paid to them. W-9s should also be obtained from vendors, detailing their tax ID numbers and whether they’re a corporation.
SB 654 and HB 1994 only reference medical cannabis companies. HB 2500, the state’s recreational cannabis bill, was introduced by the state’s House of Representatives last month. If it passes, the state’s tax law would need to be amended yet again to allow adult-use cannabis companies to bypass 280E on their state tax returns.
Passage of HB 2500 isn’t a sure thing, as many members of the Republican-controlled Senate have voiced concerns about opening the door any further to cannabis. Movement forward on the bill isn’t expected until at least 2025, if not beyond.
Also, the Drug Enforcement Administration has proposed reclassifying cannabis from Schedule I to Schedule III under the Controlled Substances Act. If that process is finalized, Section 280E will no longer apply to cannabis on the federal level. This change would automatically roll down to the state level, making the state tax exceptions obsolete.
But both the state’s approval of adult-use and the federal government’s reclassification of cannabis are only future possibilities. The ability to deduct full expenses on their 2024 state tax returns is a reality that Pennsylvania’s medicinal cannabis industry will be able to take to the bank.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Rachel Wright is a certified public accountant and the founder and CEO of Los Angeles-based Verdant Strategies, an accounting, financial management, and strategic consulting firm.
Simon Menkes supports accounting firms, their clients, and advisers through accounting and advisory services.
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Cannabis accounting experts Rachel Wright and Simon Menkes say record-keeping is crucial, noting that the state estimates millions in deductions for the next two years. /quality/90/?url=http://bloomberg-bna-brightspot.s3.amazonaws.com/fc/b8/738fc4264d979640d4e6ccffc0ed/gettyimages-2133953416.jpg” title=”Pennsylvania Cannabis Businesses Will Have More Chances to Save” /> Read More