Legal Cannabis Banking in the US
Legal cannabis banking in the United States is still an open question, even after the midterms. Cannabis legalization became a reality in two more states last week, with Maryland and Missouri joining the ranks as the newly legal states.
Nearly half of Americans now live in a legal cannabis jurisdiction. This a significant step from fifteen years ago, when no state had legal cannabis. (And only a handful permitted medical exemptions.)
But what about the push for federal legalization? And what about legal cannabis banking?
As of this writing, Democrats have been declared victorious in the Senate. So what does this mean for the cannabis SAFE Banking Act?
Right now, the government prevents cannabis companies from using federally-insured banks. They also can’t use credit cards or take advantage of other financial services.
This is because cannabis remains illegal on the federal level. The cannabis SAFE Banking Act would change all that.
“With nine Republican co-sponsors, there is a reasonable chance that the Safe Banking Act, in its current form will be voted on and be passed,” says Jason Wilson, ETFMG Cannabis Research and Banking Expert.
SAFE Banking Act When?
“Regardless of the potential change of control in Congress, President Biden’s recent direction to review the classification of cannabis under the Controlled Substances Act should ultimately provide a lift for the industry,” says Wilson.
Optimistic investors expect the legal cannabis banking bill to be on the President’s desk by the end of the year. While this wouldn’t legalize cannabis in the US, it would reveal a lot of financial pressure on the legal states. Including the two newcomers, Maryland and Missouri.
“Assuming the Biden administration’s review of cannabis results in rescheduling to Schedule III or higher under the CSA, the issues surrounding 280E and deductibility of business expenses would be resolved,” says Wilson.
By this, Wilson means Section 280E of the US Tax Code.
What Is 280E?
A business takes its gross income and deducts operating expenses such as payroll to arrive at its net income or operating profit. This is what companies have to pay tax on.
According to Section 280E of the Internal Revenue Code, a legal-state cannabis business cannot make these deductions.
280E means a cannabis business must pay tax on gross income. Which is often triple what they would pay if the government taxed their net income, like any other business.
And this is before state governments get a cut of their share.
Passing legal cannabis banking legislation, like the SAFE Banking Act, would go a long way to resolving these issues. And without having to legalize cannabis federally.
This, says Wilson, “would materially increase the earnings quality of many cannabis companies operating in the US. As well as bring new investors to the table.”
How Soon Will We Get Legal Cannabis Banking in the US?
It’s still too early to tell how the next two years will play out. But investors are hopeful that some form of the cannabis SAFE Banking Act will pass.
“In the meantime, with two additional states voting to legalize recreational marijuana yesterday and with recent legalization legislation being introduced in Germany, the size of the cannabis market continues to grow both domestically and internationally,” says Wilson.