MA Cannabis Reform Bill Signed by Governor

Posted on August 15, 2022August 15, 2022

On August 11, 2022, Governor Charlie Baker signed into law the largest cannabis reform bill Massachusetts has seen since 2017: An Act Relative to Equity in the Cannabis Industry.

The bill focused on welcomed provisions for operators:

MA Decouples from Federal 280E, Offering Significant Tax Savings
Social Equity Trust Fund Established, for the benefit of individuals of color and/or those disproportionally impacted by the War on Drugs
CCC to Review/Approve Host Community Agreements

The effective date of the bill has yet to be confirmed but indicates it may be 1/1/22.

MA Decouples from Federal 280E

Massachusetts has officially decoupled from Internal Revenue Code Section 280E, a monumental burden impacting the financial success of cannabis operators. IRC 280E is a federal regulation preventing businesses that traffic in schedule 1 or schedule 2 controlled substances (as defined by the Federal Controlled Substances Act), from deducting their ordinary and necessary business expenses on their income tax returns. Under 280E, the only expenditures that cannabis operators are allowed to claim are those items that are related to acquiring and producing inventory (i.e. Cost of Goods Sold). This disallowance can result in cannabis businesses paying effective tax rates that can reach upwards of 70%. Massachusetts has adhered to Federal IRC 280E since legalizing recreational cannabis in 2016. By decoupling from 280E, Massachusetts cannabis businesses can now deduct all of their ordinary and necessary business expenses on their state income tax returns. This will result in significant tax savings to cannabis operators.

AAFCPAs’ Cannabis Practice sees this as a significant step forward in normalizing the cannabis industry within the state while the country waits for meaningful cannabis reform at the federal level.

Bill Establishes Social Equity Trust Fund

The bill will establish the Social Equity Trust Fund used to issue loans and grants to individuals of color and/or those disproportionally impacted by the War on Drugs looking to open cannabusinesses in the Commonwealth. The fund will be seeded with 15% of the money in the Marijuana Regulation Fund. The Marijuana Regulation Fund is funded by money received for cannabis license applications, civil penalties collected for violations of the cannabis laws, and revenue generated by the state excise tax imposed on recreational cannabis.

CCC to Review/Approve Host Community Agreements

The bill also granted more power to the Cannabis Control Commission (CCC). Specifically, the CCC now can review and approve Host Community Agreements (HCA). HCAs will only be permitted for the first 8 years that a cannabusiness is in operations and the city/town Community Impact Fees can no longer exceed 3% of the business’s gross revenue. The cities/towns must also be able to prove how these impact fees are “reasonably related” to the additional costs incurred as a result of a cannabis operator doing business within the city/town.

AAFCPAs is a full-service CPA and consulting firm that serves the cannabis industry nationally. We continue to monitor ever-changing developments in federal legalization, banking reform, and state and local taxation. If you have questions, please contact David J. Gravel, CPA at 774.512.4008, dgravel@nullaafcpa.com; David McManus, CPA, CGMA at 774.512.4013, dmcmanus@nullaafcpa.com; or your AAFCPAs Partner.

About the Authors

David McManus, CPA, CGMA

Dave leads AAFCPAs’ Cannabis Business Practice, providing highly coveted tax, entity structure, and business advisory solutions. Dave has been deeply immersed in understanding the complex financial and operational nuances of the cannabis industry since 2012. He advises multi-state operators, recreational and medical retailers, cultivators, product manufacturers, and investors. He proactively advises clients on risks, opportunities, and tax implications related to market entry, accounting methods, capital structure, debt financing, R&D, M&A, and goodwill impairment. He has led industry training sessions on interpreting and implementing new federal and state marijuana statutes, including compliance with 280E. Dave maintains a strong network of cannabis industry investors, attorneys, bankers, employee compensation and benefits providers, realtors, risk managers, and insurance agents, and he leverages these resources as appropriate to help clients achieve success.

David J. Gravel, CPA

Dave is a leader in AAFCPAs’ cannabis practice. He provides tax and consulting solutions to multi-state operators, recreational and medical retailers, cultivators, product manufacturers, and investors. He has extensive experience advising cannabis operators and license applicants on optimal entity structure, maximizing deductions in accordance with IRC Section 280E, and multi-year tax planning to ensure preferred tax results, with a focus on preserving cash and maximizing lender/investor value. He also provides guidance on avoiding pitfalls associated with 280E and state and local tax compliance. He helps clients understand the critical role of cost accounting in the cannabis space, and what is scrutinized by those evaluating your statements. He provides insight on documentation needed and what to expect to support an IRS or other external audit.