Cannabis Companies

[coleboy]

Hi,

Employer has 2 companies. One company grows cannabis and makes cannabis products. The other company sells the products. I was told that a 401k plan could be set up for the store but not for the company that produces the product. I can't seem to find anything on this topic. 

Has anyone else had this scenario?

 

TIA!

[Lou S.]

Is it a controlled group? That is what is the ownership structure of the two companies?

[Peter Gulia]

The lawyer you want is Jewell Lim Esposito.  She is an experienced employee-benefits lawyer who also has a focus on cannabis, hemp, and CBD businesses.  https://www.fisherbroyles.com/people/jewell-lim-esposito

[Gilmore]

Getting into the weeds on this one?

[Luke Bailey]

FYI, Coleboy, the issue is presumably the IRS's general position that since pot is still illegal at federal level, marijuana business cannot deduct expenses. That exhausts my knowledge of the subject.

[ESOP Guy]

You will want to Internal Revenue Code Section 280E.  During the '80s at the height of the drug war the made deducting the expense related to the sale and distribution non-deductible.

https://www.law.cornell.edu/uscode/text/26/280E

They might be able to set up a 401(k) plan but not be able to deduct any of the costs and it raises the question if you can even have pre-tax deferrals.   I have never looked into Roth. 

I am NOT an expert on the intersection of this part of the law and 401(k) plans.  I learned about 280E back in my days as an IRS agent.  

There are also threads on here about how some banks and other financial institutions are reluctant to do business with a company that is technically violating federal law.

If anyone curious keep reading otherwise you can stop.  

280E is interesting as it only applies to drug crimes.  So for example a chop shop can deduct "payroll costs" of the people stealing the cars and cutting them up for parts.  But a pot shop will most likely have trouble deducting the payroll costs of the employees in the shop. 

It all stems from a famous court case where the Feds tried to get a drug dealer like they got Al Capone.  The drug dealer's clever tax lawyer managed to dramatically reduce the tax liability and thus the criminal sanctions by showing that when you deducted the costs of the operation the drug dealer's net profit wasn't very large.  Hard to believe I know but the lawyer did it.   Congress got mad and even by disallowing the deduction of the costs of operation for illegal drug operations.

[JRN]

I think what Coleboy is asking is whether the Employer can set up a plan and cover only the employees of the store/exclude production employees. If the store employees pass 410b coverage after taking into acccount all of the employees (i.e., both store and production employees), then the answer is yes (aside from the cannabis-related regulatory issues raised by others).

[Luke Bailey]

ESOP Guy,  given your informed analysis is it clear to you that the production and retail ends of the biz are treated differently for 280E? Just curious.,

[ESOP Guy]

On 7/17/2020 at 7:04 PM, Luke Bailey said:

ESOP Guy,  given your informed analysis is it clear to you that the production and retail ends of the biz are treated differently for 280E? Just curious.,

I am not 100% sure how informed my comment was verses close to 100% of what I know.   My understanding is however it covers both the production and retail side of things.   If anyone wants to know ore go to the CPA Academy https://www.cpaacademy.org/

And look at their list of free CPA CPE classes.  It seems like there is pot related class every few months.   They are pretty general as they are only 1 hour long but it might help point a person in the right direction.  

I would add it is my understanding that because of a court case cost of goods sold is still deductible which would help a retail operation.  

[Bill Presson]

I recommend contacting Ms Kirsten Curry, the owner of Leading Retirement Solutions. She has her JD and they've done a lot of work in this area.

 

https://www.leadingretirement.com/solutions/cannabis-401k-plan

[coleboy]

Apparently they already have a 401k plan that covers the retail store. They either want to set up a plan for the production company as well or start to include them in store's 401k plan. Thank you all for you comments and recommendations. I'll try reaching out to Kirsten Curry.

Sigh...I might have to become one of their customers after all of this!

[LeadingRetirementSolutions]

@coleboy Feel free to to reach out to us by email at info@leadingretirement.com, or by phone at (206) 430-508! If you're interested in more information regarding company sponsored retirement plans for the cannabis industry you can check out our recent blog posts as well:

Information on the legality of cannabis companies offering retirement plans: https://www.leadingretirement.com/blog/legal-cannabis-retirement-plan

Common questions we hear regarding 401(k)s for cannabis companies, with answers: https://www.leadingretirement.com/blog/questions-answers-cannabis-retirement-plan

Impacts of COVID-19 on Cannabis, and why now is the best time to consider employee benefits: https://www.leadingretirement.com/blog/cannabis-essential-employee-benefits

How the lack of employee benefits in cannabis is limiting the industry's growth: https://www.leadingretirement.com/blog/cannabis-job-growth-employee-benefits

3 reasons why the ROBS business financing strategy is perfect for the cannabis industry: https://www.leadingretirement.com/blog/robs-cannabis-business-financing

[Luke Bailey]

Leading Retirement Solutions and Bill Presson, understood that 280E is not going to knock out the employee's exclusion from income and rollover treatment, or the trust's tax exemption. But it will likely knock out a significant portion of the employer's deduction, i.e., the portion that you can't be attributed to Cost of Goods Sold. So there will be some portion of the money going into the plan that will be nondeductible. How do you then get around IRC sec. 4972?

[Bill Presson]

On 10/29/2021 at 6:28 PM, Luke Bailey said:

Leading Retirement Solutions and Bill Presson, understood that 280E is not going to knock out the employee's exclusion from income and rollover treatment, or the trust's tax exemption. But it will likely knock out a significant portion of the employer's deduction, i.e., the portion that you can't be attributed to Cost of Goods Sold. So there will be some portion of the money going into the plan that will be nondeductible. How do you then get around IRC sec. 4972?

Just sent you a message before seeing this. I don't work in this area, so I don't have an answer.

[Luke Bailey]

Thanks, Bill. Appreciate the candor. Not sure there's a good one. If not, the most surprising thing is that does not seem to be addressed in the articles promoting qualified plans for cannabis businesses.

[Peter Gulia]

This four-page article https://backend.fisherbroyles.com/wp-content/uploads/2020/05/Canna401k.pdf mentions [on page 2] treating some expenses for retirement contributions as a cost-of-goods-sold adjustment, and some as indirect costs that must be capitalized for an inventory.

Unstated is what I heard from young lawyers who work in accounting or dual-practice firms:  The accountants help a client develop bookkeeping and accounting methods that, within generally accepted accounting principles, push more expenses into those tax-recognized categories.

Page 4 describes some (but not all) difficulties about finding investment and service providers.

[Luke Bailey]

Thanks, Peter. Had seen that article, and I agree that there may be a way to make some of the contributions, maybe a lot depending on the type of cannabis business, into CGS. But there is going to be some significant portion, I would think, that will be nondeductible, and I think that's going to get you into a 4972 briar patch that will snowball over time. I have seen no discussion of the 4972 issue in any of the materials I have found.