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- 💸 Happy Monday, Buckle Up 💸
💸 Happy Monday, Buckle Up 💸
William McNarland & Anthony Varrell
July 01, 2024
GM Everyone,
Friday was a real shocker when you look at the tape for cannabis stocks. We knew there would be a knee-jerk reaction from investors following the debate, but we didn't think the move would be exacerbated by the IRS headline as well as the “Chevron Deference” case resolution. There is a lot of uncertainty out there right now, and this could be a rocky couple of weeks, so buckle up.
Today’s letter can be read in 8 minutes and 40 seconds.
What's Driving the Market Today?
Stock futures are down this morning:
Nvidia drops 2.8% in premarket, dragging semiconductor stocks.
Focus on ISM, S&P Global PMIs after steady PCE price index.
Non-farm payrolls data due Thursday amid Independence Day closure.
Boeing to buy back Spirit AeroSystems for $4.7 billion in stock.
💸 High Impact
How should we be looking at 280E?
The What - The Internal Revenue Service (IRS) confirmed that marijuana remains classified as a Schedule I controlled substance, maintaining the current tax regulations under Section 280E for cannabis businesses. This classification prevents these businesses from claiming federal tax deductions, a restriction that will persist until federal law changes. Despite recent movements towards cannabis rescheduling, the IRS’s stance remains firm on this matter.
The IRS last week reiterated that marijuana’s classification under the Controlled Substances Act (CSA) has not changed, reaffirming the implications of Section 280E. This confirmation is significant for cannabis businesses, which remain unable to claim typical federal tax deductions. The IRS stated, “Until a final federal rule is published, the Internal Revenue Service today reminded taxpayers that marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.”
On June 28, 2024, the IRS underscored that the legal status of marijuana is unchanged, despite some businesses attempting to file for tax refunds under Section 280E. The IRS emphasized, “The law with respect to the schedule or classification of marijuana has not changed. Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment.” This clear stance reaffirms that businesses selling marijuana, even in states where it is legalized, cannot claim deductions or credits for expenses due to the federal illegal status of marijuana.
The Why - Section 280E of the Internal Revenue Code disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance. As the IRS detailed, “Section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.”
This provision significantly impacts cannabis businesses, which are forced to operate under a unique financial strain. These businesses can only reduce their gross receipts by the properly calculated cost of goods sold to determine their gross income. The IRS specified, “This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana. Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”
The Justice Department is currently considering rescheduling marijuana, which could shift its classification from a Schedule I to a Schedule III controlled substance. This change could potentially alleviate some of the tax burdens imposed by Section 280E. However, until such a final rule is published, the current tax restrictions remain in place. The IRS’s recent statements highlight the importance of understanding and complying with existing federal tax laws until any official changes are enacted.
My Two Cents - This could not have come at a worse time for the sector, as it is now compounding the uncertainty that the Biden debate flop laid on us. MSOs have been relying on tax deferrals as well as retroactive returns potentially from years prior for some time now. Some pundits thought it was common sense that the government would not be so quick as to retroactively issue refunds, but Trulieve’s sizable tax return quickly shifted the skeptics into believing that maybe the companies would be privy to a nice capital infusion via the IRS.
This isn’t necessarily an existential crisis for MSOs, but it surely could cause the re-rating of certain ones that have a significant amount of deferred 280E taxes accrued on their balance sheets. We will see how the market digests this news this week and will be keeping a close eye out for language coming from some of the MSOs this could affect the most.
📈 Dog Walkers
Grown Rogue Completes Share Reorganization
Grown Rogue International Inc. (CSE: GRIN, OTC: GRUSF) has announced the completion of its share reorganization, which was approved by shareholders at their annual meeting. This reorganization aims to preserve the company’s status as a foreign private issuer in the United States and involves the redesignation of common shares to subordinate voting shares and the creation of unlisted multiple voting shares.
Arizona’s Medical Marijuana Market Shrinks
Arizona’s medical marijuana market has contracted significantly, now comprising only a quarter of the size of the state’s recreational marijuana sales. This shift highlights the growing dominance of the recreational market, which continues to expand rapidly.
High Tide Opens New Canna Cabana Stores
High Tide Inc. (NASDAQ: HITI, TSXV: HITI) has opened two new Canna Cabana retail cannabis stores in Alberta and Saskatchewan. These additions bring the total number of Canna Cabana locations to 156 nationwide, reinforcing High Tide’s position as a leading retail cannabis brand in Canada.
🗞️ The News
📭 Research
Initiating Coverage: Green Thumb Industries - Download Here
Reconfirming Buy Rating: MariMed - Download Here
Initiating Coverage Of Verano Holdings Corp. - Download Here
Initiating Coverage: TerrAscend - Download Here
📺 YouTube
Would We Invest in these Five Small Cap Stocks?
What we covered:
✅ Alta Global Group NYSE: MMA Alta Globel Group is a technology focus company bringing community together in the MMA community.
✅ Mineros SA TSX: MSA Mineros SA is a Colombia-focused gold miner that pays large dividends.
✅ American Outdoor Brands NASDAW: AOUT American Outdoor Brands supplies outdoor enthusiasts with all the gear that they need.
✅ AI Venture Capital TSXV: AIVC AI Venture Capital is focused on acquiring a collection of AI-focused companies.
✅ Trulieve OTC: TCNNF Trulieve is a US multi-state operator in the cannabis industry focused on the Flordia market.