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June 7, 2023

Cannabis angel investor tax credit repealed; marijuana businesses can deduct business expenses after state budget changes

Adam Wood, president of the Connecticut Cannabis Chamber of Commerce.
By Skyler Frazer

The state’s cannabis angel investor tax credit program will be repealed through the state’s new biennial budget, ending a short-lived initiative that resulted in $3.1 million in investments to qualified marijuana companies.

The repeal, proposed by Gov. Ned Lamont in January and included in the full budget package that passed the legislature this week, is expected to save the state $27.5 million over the next two fiscal years combined. 

Lamont’s office said the expansion of Connecticut’s existing angel investor tax credit to the marijuana industry is no longer needed “given the overwhelming interest in entities seeking to be part of the cannabis market.” 

Cannabis businesses will no longer be eligible for the tax credit effective July 1.

However, also included in the two-year, $51.1 billion budget — which was supported by Lamont and approved with bipartisan support in the House and Senate — is a financial win for Connecticut cannabis businesses when it comes to their tax liabilities.

Starting with the current tax year, the new budget allows medical and adult-use cannabis licensees to deduct, for state tax purposes, ordinary and necessary business expenses that would typically be eligible for a federal tax deduction but aren’t because of marijuana’s status as a controlled substance.

The cannabis industry has lobbied for more than a year for the tax deductions, as entrepreneurs balance starting a business with the high cost of building in a new, and expensive industry.

The state’s recreational cannabis industry launched Jan. 10, and recorded $31.9 million in sales through April 30, according to the Department of Consumer Protection.

The new deduction allowance is expected to save cannabis businesses $45.4 million in tax expenses over the next five fiscal years, according to state estimates.

The Connecticut Medical Cannabis Council, Connecticut Cannabis Chamber of Commerce, and several local and multistate cannabis operators supported the tax deduction legislation.

Adam Wood, president of the Connecticut Cannabis Chamber of Commerce, had a mixed reaction to the two changes in the state budget, saying he hopes lawmakers reconsider the decision to shut off cannabis companies’ access to the angel investor tax credit, given that “access to capital is one of the biggest challenges to market entry.”

“The angel investor tax credit program is a useful tool that has been successfully used by several cannabis businesses in Connecticut,” he said. 

However, he praised lawmakers for allowing cannabis businesses to deduct their business expenses. 

“We realize that the budget is the result of a complex bipartisan compromise,” Wood said. 

Slow start?

Connecticut Innovations, the state’s quasi-public venture capital arm, administers the state’s general angel investor tax credit program, which has been around for more than a decade and allows accredited financiers to receive a tax credit for investing in qualified businesses.
In 2021, state lawmakers created a separate cannabis angel tax credit program offering $15 million in annual tax credits for $37.5 million in investments, equal to a 40% tax credit against a Connecticut tax liability. 

It targeted investments in social equity cannabis companies, and so far, it’s led to $3.1 million in investments in two companies by 33 angel investors.

The program has gotten off to a slow start, but officials noted the state’s recreational industry is just getting off the ground, and more investments were expected in the coming months and years as more social equity companies earn a license and come online. 

Three companies qualified for the program before its repeal.

Two of them are linked to Budr Cannabis, a startup founded by healthcare entrepreneur Derrick Gibbs Jr. and cannabis industry vet Carl Tirella. The company, which also includes a team of social equity entrepreneurs and multistate operator Green Thumb Industries, is using $2 million raised from angel investors to open a Danbury adult-use dispensary.

Tirella said Budr was hoping to raise another $2 million for a West Hartford dispensary that is expected to open this summer. The company has plans to open three additional cannabis retail locations. 

“To be honest, the tax credits are actually a huge benefit to an investment because you’re receiving 40% of your initial investment back in a few months,” Tirella said. “We’ve been utilizing that to really help ease the complexity of a social equity cannabis investment — it is a real significant added benefit for most.”

Business deductions

The business expenses deduction has been a major issue for cannabis companies in Connecticut and nationally.

Cannabis retailers’ effective tax rate can be as high as 80%, experts say, largely because marijuana companies are unable to deduct their business expenses -- such as rent and employee salaries -- from their state and federal taxes due to cannabis still being illegal at the federal level.

Normally, companies can deduct “ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business,” under Section 162(a) of the Internal Revenue Code.

But companies engaged in the trafficking of “illegal” drugs are prohibited from deducting typical business expenses.

Cannabis remains classified as an illegal Schedule I controlled substance under the federal Comprehensive Drug Abuse Prevention and Control Act of 1970.

With the new state budget, however, Connecticut joins a number of other states that have “decoupled” from the federal prohibition, allowing cannabis companies to deduct business expenses from their state taxes.

House Majority Leader Jason Rojas (D-East Hartford) was a major backer of the business deduction legislation, arguing it would level the playing field for cannabis companies, so they can deduct their expenses the same way as other Connecticut companies.

“Everyone I’ve met says it’s an incredibly challenging business to get into, particularly because of the capital costs that are needed, but also the regulatory environment is very complicated as well because you are dealing with a controlled substance that is still illegal at the federal level,” Rojas said. “... Anything that can be done to help reduce the cost of doing business, I think is to the benefit of the state, if we want to see this marketplace actually succeed.”

HBJ Web Editor Andrew Larson contributed to this story.

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