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The emerging cannabis sector is clearly gaining traction, and its impact was examined in a study published recently by New Frontier Data. Its report, “Cannabis in the U.S. 2021 Mid-Year Market Update” found there are four million medical cannabis patients nationwide, a number expected to increase in correlation with new medical markets as they become operational. Furthermore, the study projected a combined 5.4 million registered medical cannabis patients in the U.S. by 2025, representing nearly 2% of the entire U.S. population.
But as with any growing market, the biggest risks are in navigating the regulatory lines as they are still being drawn.
“The fear of the federal government stopping the momentum of the cannabis industry is waning,” said Nikolas Komyati, a principal at the law firm Bressler Amery and Ross in New Jersey, and the practice area leader for Bressler’s Cannabis Law Practice Group. “That said, you still are in an industry which is legal under state law but illegal under federal law.”
Komyati said this struggle is encapsulated by Section 280E of the Internal Revenue Code, which denies deductions and credits for amounts paid or incurred in carrying on the trade or business of trafficking controlled substances in violation of federal or state law. This means plant-touching entities cannot deduct ordinary business expenses in the same way as nearly every other business in the country, he said.
“This leads to these entities paying very high tax rates because the federal government does not allow cannabis businesses to deduct most expenses other businesses do,” Komyati noted. “It can be a deterrent for new business owners. There are bills pending in Congress that aim to resolve this, but have not yet been passed.”
Komyati said he was not surprised that New Frontier Data expects the sector to see revenues of $43 billion in 2025, adding the upside potential in cannabis will be even more prevalent “as markets become more mature and as the East Coast comes online.” But he warned that professionals and even lawyers should strategically approach the “green rush,” and avoid the notion of becoming proprietors or even practitioners overnight.
Also a principal in Bressler’s securities practice, Komyati said it was nearly five years ago when his contacts in the cannabis industry complained about the inability to get bank accounts due to federal prohibition. He also heard from financial institution clients who spent “half their day” navigating issues raised by cannabis companies or principals. That was when he saw an opportunity to merge the two areas and start the Cannabis practice.
“There is an inherent skepticism of ‘outsiders,’” Komyati said, “and you must build up trust between the clients, attorneys and other professional service providers as the industry is still being built.”
Justin Smulison is a professional writer who regularly contributes to Best Lawyers. He was previously a reporter for the New York Law Journal and also led content and production for the Custom Projects Group at ALM Media. In addition to his various credited and uncredited writing projects, he has developed global audiences hosting and producing podcasts and audio interviews for professional organizations and music sites.
