Marijuana companies can now deduct expenses on state tax returns

Darryl Deel: Labor and rent are among eligible tax-deductible business expenses.

Tax change

Language in the 38-page Amendment 3 passed by Missouri voters in November 2022 notes a tax filing change for the state’s marijuana businesses. It reads, in part: “For taxpayers authorized to do business pursuant to this article, the amount that would have been deducted in the computation of federal taxable income pursuant to 26 U.S.C. Section 280E of the Internal Revenue Code as in effect on Jan. 1, 2021, or successor provisions, but is disallowed because cannabis is a controlled substance under federal law, shall be subtracted from the taxpayer’s federal adjusted gross income, in determining the taxpayer’s Missouri adjusted gross income.”

As November’s passage of Amendment 3 legalized recreational marijuana, companies operating in the burgeoning industry also benefit from the new constitutional amendment from a tax perspective.

For the first time this year, marijuana companies can deduct some business expenses when filing their state taxes, according to the Missouri Department of Revenue.

“Amendment 3 provided for a business expense subtraction for tax years 2022 and forward,” said department spokesperson Anne Marie Moy, via email.

Although medical marijuana was legalized in the state in 2018, federal law maintains growing, selling or transporting cannabis as a crime. It remains a Schedule I drug under the Controlled Substances Act in the same category as heroin, LSD and ecstasy, according to the Drug Enforcement Administration. Prior to voters approving state Amendment 3, marijuana companies were prohibited from deducting business expenses on their tax returns, unlike every other legal company in Missouri. Federal law remains unchanged.

The tax filing process previously wasn’t advantageous to the state marijuana industry, said Darryl Deel, CEO and chief financial officer of Flora Farms LLC.

“A dispensary can only deduct against their sales revenue the cost of buying the cannabis product. They can’t deduct anything for the people to sell it. All your labor, utilities, rent, insurance – that’s all nondeductible,” he said of past tax filings. “The state of Missouri, once they approved it to be legal for adult use as well as medical, they said they’ll allow legal marijuana companies to deduct those extra expenses.”

Deel estimated the tax change results in roughly 25%-30% of additional costs now deductible for a dispensary. The Humansville-based company, which is vertically integrated in the marijuana industry, operates cultivation and manufacturing facilities along with three dispensaries in the Ozarks.

“We’re happy that they’re doing it. It certainly will save income tax dollars for anyone in this market,” he said, adding Flora Farms has yet to calculate its probable tax savings. “For a large operator in the state, whether it’s us or somebody like us, I’m guessing that it’s probably measured as much as $100,000 in savings for taxes in the state of Missouri. It could be as low as $10,000.”

Dana Sullinger, general manager and co-owner of Missouri Joint Ventures LLC, which operates a dispensary in Nixa, said she’s also uncertain of what savings are in store for her company after the tax deductions. She just confirmed the tax filing change on Jan. 23 with the Missouri Cannabis Trade Association. 

“I’m sure it will be significant. Every dollar that we can save is a win for us,” she said, noting her employee count recently peaked at 15 in advance of adult-use marijuana sales expected to begin in early February. “It will make paying taxes a whole lot nicer.”

John Payne, campaign manager for Legal Missouri 2022, which advocated for Amendment 3’s passage, said via email licensed cannabis businesses are legal under Missouri law and should not be “taxed at exorbitant rates and treated in a wildly different manner than the tax code treats all other businesses.”

“We would also love to see the federal government allow the states to set their own laws with regards to marijuana and end the federal prohibition, but that’s not something we can change at the state level,” he said.

State Sen. Denny Hoskins, R-Warrensburg, prefiled Senate Bill 278 in December to approve business expense deductions for marijuana companies on state tax filings. However, state officials say the legislation is unnecessary because of Amendment 3.

“Senate Bill 278 does not need to be passed to legally deduct marijuana-related business expenses,” Moy said via email.

In 2021, state lawmakers approved a similar piece of legislation from Hoskins as an amendment to a wide-ranging bill, according to media reports. However, Gov. Mike Parson vetoed the legislation due to a clause that gave tax breaks to companies under city and county public health restrictions. A similar bill failed to reach Parson’s desk last year.

As Amendment 3 went into effect, medical marijuana sales were $40.2 million in December – its highest monthly total since dispensary transactions began for the industry in October 2020, according to Missouri Department of Health and Senior Services data. Industry officials project businesses participating in the recreational marijuana space will eventually see sales at least double once the market expands in February.