Federal ban makes it difficult cannabis to conduct business fairly and honestly. Not only does it deny them access to the financial system, it also denies them the right to US federal income tax deductions for ordinary and necessary business expenses, even though they are recognized at the state level as a legitimate business.

Section 280E of the Internal Revenue Code places strict limits on the taxes that marijuana businesses can deduct, often forcing them to pay higher effective tax rates than other traditional businesses.

The IRS updated its guidance for cannabis operators in 2020, giving those businesses the ability to reduce gross receipts using an accounting method available in Section 471.

In this section, businesses that need to generate less than $25 million in revenue can deduct a significant portion of their expenses.

Which MSOs top the list of users of tax liability loopholes?

Cantor Fitzgerald analyst Pablo Zuanic took a closer look at how cannabis MSOs are using tax debt to access capital to fund their operations at lower rates in his recent note.

The analyst said the 280E tax rule is “unfair” and that companies delaying some of the tax payments need not be bad.

“The interest rate charged by Uncle Sam is well below what most U.S. cannabis companies pay today,” he said.

Zuanic analyzed MSOs that dominate the market, their balance sheet strength, cash flow and debt structure, as these factors can significantly impact share prices.

“We examined 15 of the larger MSOs for overall debt and tax liability levels (both short- and long-term) to assess balance sheet strength and companies that may need to raise liquidity,” the analyst said.

Zuanic raised Verano Holdings Corp. VRNR VRNOF and Curaleaf Holdings, Inc. CURA KURLF as the “most active users” of these tax debt loopholes at $472 million and $500 million, respectively, of their debt from…