The Gold of Pot at the End of the Rainbow

I thought that my experience with budding cannabis entrepreneurs (Bad pun. I am thoroughly ashamed of myself.) might be of some interest.

For many years, there was an upscale Kosher catering hall in Baltimore named “Blue Crest North.” The building is at the end of the block where I live. After the original owners sold the facility, including both the real estate and the catering business, it began a long decline. The new owners, in an attempt to keep the ship afloat, rented the hall out as a venue for seminars given either by a multi-level marketing organization or some sort of “invest in real estate with no money down” scheme. While walking my dogs, I would pass the building. I saw the incoming attendees to these seminars-earnest, honest, but clearly clinging to the lower edge of middle-classdom. They would walk in with seminar material and clipboards in hand, certain to take copious notes. Somehow, I knew that their efforts would come to naught.

Now, a couple of months ago I was invited by some subgroup of the University of Maryland to give a presentation at a two-day seminar on starting and operating a cannabis business. My topic was, of course, the tax aspects of selling cannabis. I previously mentioned the seminar here with a link to my speaker’s outline. In the presentation, I particularly focused on 26 U.S.C. 280E. That Code section provides as follows:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

I made it clear that, in my opinion, Section 280E makes it virtually impossible to derive a significant profit operating a cannabis business. (I note that a colleague of mine claims to have clients who are making serious money in the business. I have my doubts. I think that any current profitability is due to the novelty of legal cannabis. For the reasons suggested by Mark’s analysis here, I think that any profitability is a short-term phenomenom.)

In any event, when I got to the venue I discovered that even though there was a UofMD sponsorship, the primary sponsor was a group that apparently puts on these seminars on a for-profit basis and then collects additional fees acting as a consultant to cannabis entrepreneurs. I looked at the audience. The attendees were the same people that I used to see walking into seminars given at the Blue Crest.

At the end of my presentation, one very unhappy attendee asked: “Are you saying that we cannot make money in the cannabis business?”

Well, yes.