As it starts to seem more imminent that we may actually see real cannabis law reform this year, a lot of questions remain surrounding what the impact will be to businesses nationwide. There are a few things that business owners really need to consider in anticipation of significant impacts to their operations.
To begin simply, rescheduling will immediately and drastically impact the valuation of these organizations. If you're someone who has been considering merger and acquisition activity, if you are an investor or have investors, it is important to understand that the valuation of the business can impact you in any potential future sale.
While rescheduling doesn't immediately impact banking laws, it is assumed that banking and lending challenges may arise following a rescheduling. This means that business owners need to be prepared to do their due diligence and consider what other options are out there and in the business's best interest. While many businesses have operated in cash, or with terrible lending terms, the ability to refinance debt or equity in a way that is more sustainable may now be on the table.
There are also massive accounting challenges that will need to be addressed. Many cannabis businesses have been using accrual-based accounting rules to aid in tax reduction by benefiting from cost allocation strategies. With 280(e) out of the picture these accounting requirements may no longer be the best fit for every business. The challenge in that is the IRS requires businesses to report accounting changes and tax implications can sometimes follow. Business owners will need to have an experienced CPA on board to help them make sound strategic decisions about any changes and how to execute them.
Following the potential change from accrual to cash or modified tax basis accounting, there are also entity structure considerations. Many cannabis businesses looked to C Corps and the lower tax rates to save them from 280(e) but C Corps have never been the best fit for small business owners. Changes in tax laws may mean taking a look at the entity's ability to restructure and what to restructure to.
There's no doubt that big changes are on the horizon for cannabis businesses this year. Having a professional who understands all the nuances and can help you navigate them is going to be more important than ever. While tax law changes might provide an immediate cash windfall, strategic decisions as to how to move forward will still be the difference between businesses that survive for the long term or eventually sell for the highest values.
If you're not sure how these coming changes may impact your business and you want to understand how to be more prepared, contact our office for a free discovery call.