Four bills seek to modify Oklahoma tax law for cannabis businesses

Cannabis businesses may soon be able to deduct expenses from Oklahoma taxable income, but some could lose existing exemptions.

Everyone dreads tax season, but those in the cannabis industry know a different level of loathing. Due to the schedule 1 classification of cannabis, federal tax code 280E prevents legal cannabis businesses from being able to file “ordinary and necessary” business deductions. Therefore, a cannabis business owner’s federal tax liability is based upon their gross income as opposed to their net income, which can cause tax bills to be equal to or greater than the business’ profits.

So far, this policy has been mirrored on a state level - leaving many Oklahoma businesses operating in the red. Now, three bills filed in the Oklahoma State Legislature seek to address this particular tax challenge for cannabis businesses on a state level.

SB 1117, SB 389 and HB 2101 would all allow a deduction from Oklahoma taxable income equal to the amount of any deduction for business expenses incurred in conducting applicable licensed medical marijuana business activity. All bills would apply to the taxable year of 2024, by which time the issue could also be addressed federally.

On a federal level, the Marijuana 1-to-3 Act has been reintroduced, which would move marijuana from Schedule 1 in the Controlled Substances Act to Schedule 3. The Biden Administration has also requested an administrative process to review “expeditiously” how marijuana is scheduled under federal law. If cannabis is reclassified, one of the several benefits would be 280E would no longer apply to cannabis businesses, allowing them to deduct expenses federally as well.

Another bill, SB 133, would remove existing agricultural tax exemptions for medical marijuana growers. Currently, a marijuana grower can apply for an agricultural tax exemption with the Department of Agriculture and receive the same tax benefit as any other agriculturally focused business when purchasing farming equipment. The way the bill defines marijuana according to statute seems to imply the loss of tax exempt benefits would also apply to farmers within the Industrial Hemp Program, regulated by the Department of Agriculture. If passed, SB 133 would go into effect in November of 2023, well before any chance at further tax benefit or relief being provided to the cannabis industry on a state or federal level.

Cannabis is now America’s 5th most valuable cash crop and its market size is projected to expand to reach $52 Billion by 2026. The rapid embrace of legalization efforts across the country has far outpaced implementation of necessary reform to fully integrate cannabis operations into financial systems and left the industry with a cash problem. Tax and banking reform for cannabis businesses remains one of the final frontiers to fully legitimizing the industry. Multiple pathways emerging and the growing bipartisan support suggests we may be on the brink of covering considerable ground this year.