Problems with the IRS actually keep competition at bay. "There's a reason big tobacco, big alcohol aren't in this space right now, because if they were, they'd probably put us all out of the game," he said. "Fortunately, the margins are there," said Terra Tech's Peterson, though he added that he believes some companies are operating with "one foot in the black market" to maintain profitability.įinally, falling prices, lower margins and a higher-than-normal federal tax bill don't seem like the components of a successful business model, but Peterson sees an advantage. No one has claimed that has happened yet. Without normal business deductions, "You could end up with a tax bill far more than any potential profit you make." "I've seen profit margins drop about 40 percent in the last five years," he said. Jeremy Carr owns the Exhale dispensary in West Hollywood and is also the CEO of BlazeNow, a website that provides information and reviews other outlets. Cullen in Colorado said that before legalization, an ounce of black market marijuana in Denver would cost $400 "for high-quality product." Today? "You could find it in Denver for $175." That could become more critical as legalization brings prices down and squeezes margins. "A lot of people will embed a lot of the labor expense in the cost of the product," Peterson said, "which is actually one of the reasons why I think the product has maintained the wholesale value that it's at, because that's been a work-around." The company's tax team works to segregate the tax burden among subsidiaries, moving as many business costs as legally possible to areas where deductions are allowed, especially in growing. But Terra Tech also owns subsidiaries that do not directly deal with marijuana - such as a company that makes growing equipment, and a firm called Edible Garden that sells regular produce to retailers such as Wal-Mart. It recently acquired the Blum Dispensary in Oakland, California, where medical marijuana is grown and sold legally to patients. Full-year revenue is estimated between $25 million and $30 million. Peterson came from Wall Street to the cannabis industry in 2010 to start Terra Tech, a publicly traded holding company that owns a variety of pot-related businesses. "Companies in our business are paying anywhere from 40, 50, 60, 70 percent." "The tax burden is significant," said Derek Peterson, CEO of Terra Tech. The IRS code in question is 280E, and it remains one of the greatest barriers to entry in the legal cannabis business. "They certainly cash our checks every month." "If we're licensed and legal in Colorado, that should be good enough for the IRS," he said. Pot is illegal on the federal level, but the IRS code states, "Marijuana businesses are required to file federal income tax returns." However, cannabis companies are significantly limited in taking deductions, because their business "consists of trafficking in controlled substances … which is prohibited by federal law or the law of any state in which such trade or business is conducted."įor Cullen, that means he cannot deduct the cost of rent, advertising and payroll, "all items that every other business in the country gets to deduct." Ironically, he can deduct the cost of growing marijuana, which the IRS does allow as a "cost of goods sold." Bottom line, the lack of normal business deductions will trim $1.5 million from Cullen's profits. Personal Loans for 670 Credit Score or Lower Personal Loans for 580 Credit Score or Lower Best Debt Consolidation Loans for Bad Credit
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