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Medical marijuana: Does it make business sense?

Despite the hope of getting everything set up before medical marijuana can be grown, bought, and sold in Kentucky in 2025 -- the reality is there will be challenges.

LOUISVILLE, Ky. — March 30 was a historic day in Kentucky.

The excitement of passing medical marijuana in the legislature culminated with Democratic Gov. Andy Beshear signing it into law the very next day.

You could feel the momentum growing as lawmakers, Democrats, and Republicans stood together with the governor and celebrated.

Now, the state Cabinet for Health and Family Services (CHFS) is in charge of the logistics and recently provided this emailed statement:

"The Cabinet for Health and Family Services (CHFS) is moving quickly with the goal to have the program ready much earlier should the General Assembly decide to speed up its timeline. We are currently engaging with internal partners, such as ABC, that may help CHFS in similar ways that were done for Delta 8.” – Susan Dunlap/CHFS Office of Public Affairs

Despite the hope of getting everything set up well before medical marijuana can be grown, bought, and sold in Kentucky in 2025 -- the reality is there will be challenges, including selling small business on the profitability of pot.

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“In order for Cornbread Hemp to jump into this space, we’re gonna need much more clarity on the financial side of things because we’re a small family owned business,” Eric Zipperle, co-founder of Cornbread Hemp, said.

Cornbread Hemp manufactures and sells CBD products, so getting in the business of THC products derived from cannabis might seem like the natural transition.

Maybe it would be if legal marijuana-based businesses in states were treated like every other business.

“It’s very difficult for full strength cannabis companies to get traction as a business,” Jim Higdon, Cornbread Hemp’s other co-founder, pointed out.

The difficulty is most apparent during tax season.

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“I think most people who aren’t in the industry yet, probably have no idea about 280E,” Zipperle said.

280E is a federal tax code passed by Congress in the 1980’s aimed at preventing drug dealers from writing off common business expenses -- such as advertising, wages and salaries, and advertising.

According to 280E, “expenditures in connection with the illegal sale of drugs (Schedule I and II)” are not deductible.

Forty years later, marijuana remains a Schedule I drug and is therefore illegal on the federal level, even if it is legal on the state level.

“You can deduct your cost of goods sold,” Bill Jessee, a Certified Public Accountant and managing partner at Henderman, Jessee & Company, said. “You just can’t deduct any of your operating expenses.”

That can be substantial and can double a business’ tax rate to more than 50 percent.

“They’re in the hole to begin with,” Jessee said. “The taxes will tear them up, they won’t be able to afford it, and they can’t get loans.”

His advice to folks hoping to start a medical marijuana business is to “sit on the sidelines until we see how this plays out.”

The playing field is already uneven, not just because of 280E, but also due to the fact that state legal marijuana-based businesses usually can’t get insurance, can’t get a bank loan or can’t even open a bank account to deposit their money.

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“A lot of these players in these industries are dealing in cash,” Jessee said.

That sounds the alarm on security on top of all the other challenges.

So how do the bigger marijuana growers and sellers do it?

Jessee believes they have significant investor backing and the scale of their production may make it easier to absorb the tax burden.

“A big operation with cost of goods sold, their gross profit is so much significantly greater,” he said.

However, even for them business doesn’t appear to be as good as it used to.

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FOCUS found that over the last five years, share value in some of the biggest, multi-state marijuana operations tumbled as much as almost 70 percent.

A Curaleaf share, for example, peaked at $16.86 in 2021, but by Monday, the value was only $2.96.

Jessee is not surprised that marijuana-based businesses are struggling.
“There’s 38 states now [with legal medical marijuana],” Jessee said. “Congress should address this at this point.”

The Small Business Tax Equity Act could be that step.

The bill would essentially allow marijuana growers and sellers in legal states to be exempt from tax code 280E.

The bill was first introduced in Congress in 2019, but didn’t gain much traction.

Last month, on April 17, it was reintroduced in the House.

“People need to reach out to their representatives in Congress,” Higdon stressed. “This is about protecting Kentucky farmers and Kentucky small businesses in this process.” 

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