How the One Big Beautiful Bill Act Changes Everything for Cannabis Operators and Small Business

Speaker A: Foreign. Hi, everyone. Welcome back to the what the Hemp podcast series. My name is Lindsey Valentine. I'm a CPA and tax supervisor here at Witham. I'm excited to dive into another episode where we're going to break down tax and policy developments shaping the cannabis industry and the broader business landscape. Today, we're tackling the one big, beautiful bill Act. This legislation touches nearly every corner of the tax code. Individuals, families, pass through, entities, corporations, you name it. So to help us break it all down, I'm joined by our very own, um, Ray Owens, senior tax manager in Witham's cannabis practice. I'm thrilled to have Ray here today to help us walk through some of the key features of the bill and what our audience should be keeping an eye on. So, Ray, thank you so much for joining me.

Speaker B: Thank you so much for having me. And that was a very polished intro. I just want to commend you on that. Um, I'm going to now question if that was AI generated.

Speaker A: I'm flexing my podcasting skills here. Maybe. Maybe accounting's not for me.

Speaker B: Tell Steve you're coming for his job.

Speaker A: That is all jokes. Okay, so I'm thinking let's start off and tackle some of the key changes for individual taxpayers. The bill's packed with changes, but if you had to condense it down to what's most important for individual taxpayers, what would you highlight first?

Speaker B: Sure, sure. I think that import. You know, it's important to look at the individual changes because even though the business community might not think of them first, they really impact everybody. So one of the tough things that came into play with TCJA was they needed a revenue raiser. So they actually wound up limiting the SALT cap, the state and local income tax deduction that taxpayers were appreciating on their itemized deduction, Schedule A, they limited it to $10,000. Now, in certain states, like Florida, without state income tax, that might not be a big deal. But in high tax jurisdictions like New Jersey, New York, California, Massachusetts, even, uh, people got really hammered by that. So it's very exciting to see that in this most recent legislation, they upped that from 10,000, 40,000 for a subset, uh, of the taxpaying population. Now, that's also indexed, that's going to increase. It does phase out, uh, especially for married taxpayers, somewhere around $500,000. And there's other limitations baked in there, but it's a really positive change. A couple of other things that are noteworthy in this section, um, and a lot of people that, uh, are in the Gig economy and have hourly jobs are very excited about this. They actually put in a little bit of legislation that says, uh, that there's no tax on tips. And so I know that that was a, uh, policy proposal that even Democrats proposed when they were out in Las Vegas because very broad support among that part of the voting population. Um, and obviously it made its way into the bill, but with some nuances. Then lastly, uh, just important for anybody looking to upgrade their home or buy a car, a lot of these clean energy credits, uh, the energy efficient appliances, things like that. We saw some of these credits go away actually. So this is something that had to come off the board. But, you know, you have to give a little and get a little when it comes to tax law.

Speaker A: Excellent. Thanks for that pivoting to businesses. So I think the changes from the big beautiful bill, um, are really heavy on the business provisions too. So what are some headline changes that business owners should consider, uh, coming into their 2025 tax filings?

Speaker B: Sure, sure. So it's not that there's a lot of things across the board, but it's that there's some very targeted areas that really got updated. So one of the biggest is actually in the area of depreciation. So really a lot of manufacturing has left the country. There's not a lot of industry growth. One of the things they really wanted to do was make sure that businesses were thriving again and that GDP was going up in the right direction. In order to do this, they brought back bonus depreciation and made it permanent. Now this was a hot button topic back in 2017 because, you know, in order to meet their revenue goals, they had to have it phase out. So we are actually set to, I think, only have about 40% depreciation in the current year. Now subject to certain thresholds, you're back up to 100%. Um, one of the other things that happened was the qualified improvement property section was made permanent. Um, for those of us who were in the tax industry back in 2017, 2018, there was a big fiasco when leasehold improvements went away and they had to have a technical correction to get qualified improvement property back into the bonus eligible category. Um, because they kind of defaulted back to 39 years. Um, and then this is one that I'm really excited about, especially for some of our cannabis clients is there's the qualified production property section. Now this would lead for a hun, this would lead to a hundred percent bonus eligibility for producers, which is going to be a lot of our manufacturing clients.

Speaker A: Right.

Speaker B: And this can even qualify, uh, for real estate. So real estate's the type of thing that's not typically eligible for bonus here, subject to certain limitations. You might be able to bonus the building as well. And you need to look at a couple things, right? It has to be US based. It has, has to be part. An integral part of the production activity. And then it also has to either be constructed or placed in service after the bill came in or well, actually January 19, 2025. So let me take that back. Um, but it's, it's very exciting because previously, even with the right cost seg, which we have a great team here that's helped a lot of our clients, even with just excellent documentation, you'd still be limited that your big building that was the bulk of your purchase wouldn't be bonus eligible. So this is a really great thing that we're really excited about.

Speaker A: Right. And I, um, going on that section 1792 also received a bump in the, uh, limit. Is that correct?

Speaker B: And that's really exciting too because bonus is an election to accelerate all of your depreciation into the current period. 179 is a little bit different in that it's an election to expense a purchase as opposed to depreciating it under the old method. But there had been limitations on 179 total, um, assets placed in service, percentage business use, other things. They roughly doubled it. And 179 hasn't been as popular in the past couple years. It's really popular if you're in the right state. So you need to pay attention to what your state rules are because certain states decouple from the federal rules. And in certain states you may get more benefit from 179ing an asset as opposed to taking bonus on it. So working with the team to go through that is really important. But you're right, that's also a very exciting change.

Speaker A: Yeah. Uh, right. Like California is one state that comes to mind. They have different rules on 179. There's a few other.

Speaker B: I think we need a whole new podcast to talk about California to states either follow. They have either rolling conformity with federal tax law changes to conformity with tax law changes, or just a whole separate set of rules. Um, we have an entire SALT group that focuses on this. But what I can say is that certain states, they need to pass new legislation if they don't have rolling conformity. And California is one of those states actually doesn't recognize some of the most recent tax law changes. So if you're in California and you want to bonus things, that's a separate conversation. You should pay very close attention to those rules.

Speaker A: Okay, so I feel like that covers the updates on depreciation. So let's switch gears and talk about some recent developments in the research, uh, and development space. So prior to the obba, taxpayers were amortizing their domestic research and development costs and amortizing them over five years. Correct.

Speaker B: So there were rules that there were domestic and there were foreign rules too.

Speaker A: Right.

Speaker B: So a lot of things changed, uh, a few years ago with the tcja, and again, they needed revenue raisers. So I don't know about your clients, but a lot of my clients are trying to create new products. And so this was a big change previously. It was, it was all sunshine and rainbows. Everybody got an R and D credit. Things were great. Now all of a sudden you had to contend with the 174 rules, which was a much larger list of things that were caught in this research and experimen experimentation. Bucket and clients were noticeably upset. They had to capitalize them and amortize them, subject to these rules. They've been lobbying, there's been intense lobbying in Washington to get rid of these rules for years now. And finally with the obba, we're getting rid of some of them. Um, it doesn't really touch foreign companies as much, but domestic companies now, depending on who they are and what they're doing, they can either immediately expense or they can elect expense over a couple years, or if they're small taxpayer, they can actually go back and even amend returns. So that's very exciting as well. And that's going to give a lot of relief to some of our clients.

Speaker A: Definitely. Uh, and like you said, our manufacturer clients and also considering our cannabis operators, with rescheduling coming down the pike, that this might open up a lot of opportunity for them as well.

Speaker B: Yeah, I agree. These are the types of costs that wouldn't typically be in cost of goods sold if you really follow your GAAP and your 471C rules. So the ability to have some flexibility here to decide when you want to try and take this deduction, um, it could be really advantageous to somebody who might be dealing with 280, you know, so maybe they don't want to amend a prior year return because they won't get any benefit. Maybe they really want to look at everything prospectively. And if they're a small taxpayer, they have a lot of flexibility there. If they're a large taxpayer, they really, most of the time can go one of two routes. Either you decide that this is the year you want to take it, which in 2025 we still expect 280e to apply 26, though we're hoping it's going to go away. So you might be able to take the expense over two years. Um, but there are some other caveats. Under 59 or 174, you could still typically, you know, potentially kick it out over five or 10 years. So there's a lot of planning opportunities there. Um, so good planning is really going to be key.

Speaker A: I also want to touch on the qualified business income deduction. Now, this isn't brand new to the tax code, but it is now, uh, a permanent deduction. Can you tell us a little bit more about that?

Speaker B: So this was interesting, right? It's so hard to pass a tax law and keep everybody happy, right? So if one group lobbies and spends a lot of money to get one provision, another group's generally upset, right? Because there needs to be balance. You can only add so much to the budget, et cetera. So when the TCJ came in in the latter part of 17, you know, one of the big political promises that was made was that they were going to lower the tax rate. We were going to bring business back to America, right? So at that time we'd had this tiered progressive tax structure for corporations that went all the way up to 35%. What they did was they brought it down to 21%, made it a flat tax and you know, suddenly the idea of a corporation became very palatable. In fact, you know, we've seen an explosion of it in cannabis, right? But they needed to keep the other side happy too. And we've had a proliferation of LLC is over the last 30, 40 years. There were so many flow through entities that now they're looking at their top tax rate and they're saying as an individual it's 37%. How am I supposed to compete with the guy who's 21%? So QBI came into play. So what they did was they, they basically put a mirror kind of a provision in the flow through code that said that if you're a qualifying business, you can now take a haircut on your flow through qualified business income. And it could be up to 20%, but subject to certain limitations. Some for wages, some are for real estate. So, so really, if you do all the math and you do everything perfectly, you can now get a maximized benefit of a new rate somewhere around like 29.6%. And some of our clients are limited on that. You can only take a W2 wage base based on what you actually deduct, which for most businesses is box 1 or 5 of all the W3 wages. But if 280e something like that comes into play, or you have some other limiting factor where you can't deduct wages, maybe it's accrued but not paid within the right timeframe, you really couldn't have that maximum benefit. So that's something to pay a lot of attention to. But that notwithstanding, as long as you're a qualifying business, this becoming permanent is a really great benefit and really locks in for a lot of our clients that they're going to pay a lower tax rate on their business income in the future.

Speaker A: Absolutely, yeah. I also wanted to discuss the qualified small business stock exclusion. So there have been some updates in this space. So what exactly was the benefit of qualified small business stock prior to the obba?

Speaker B: I have to admit, I feel like I should ask you that question.

Speaker A: Sure.

Speaker B: What do you remember about it?

Speaker A: So I remember that there was a minimum holding period of five years, and if the stock met all the requirements and you held onto it for five years, taxpayers could exclude up to 100% of the gain. And that gain was capped, uh, at the greater of $10 million or 10 times the basis in the stock. But now I understand that the, the holding period, the minimum holding period is now three years and the gain exclusion has also changed.

Speaker B: Yeah, no, that's, that's perfect. This is one of the best benefits in the entire tax code. It really is. So what, what they wanted to do is they just really wanted to incentivize people to invest in small business and to hold it and to really try and build something. Right. And so they said, you know, if you, if you, if you met all those holding periods, we wouldn't even tax you on the way out. And that number has floated at 1.50%, at 1.75, eventually got up to a hundred. But the holding period was, was kind of problematic for people who are serial entrepreneurs. Like, I know a couple people like that, and they don't, they don't usually stay in one place for five years. So they, they came up with this tiered structure. They wanted more people to get the benefit, even in a shorter period of time. So like you mentioned, now if you do it for three years, you can have up to a 50% exclusion. If you go up to four years, 75%. And then if you meet the old requirements, you still have that hundred percent. It's important to acknowledge that there's very specific definitions. This does get technical. Um, and this is why we keep Dan Mayo of our national tax group on speed dial. We write memos for people on this all the time because you don't want to mess this up. But you need original issuance stock. It's got to be during the C Corp. Period. It needs to be original issuance to you. It gets very tricky with things like options. You need to then hold it and then you need to, like you said, meet certain qualifiers as to whether or not your base meets it or your total value. And it's also important to remember that you need to be a qualifying business. So one area where we also see clients run into trouble is, you know, things like farming are not qualifying businesses and other, other, other businesses might not qualify if they're service based. So it's very important to get this right. But if you get it right, it's a great benefit. And I love to see that they've changed this a little bit to allow more people to participate in it.

Speaker A: Yeah, that's huge. And it seems like it's a really massive tax planning tool. So entrepreneurs, people that have this stock that might be a little bit intimidating to file on your own without the opinion and the expertise that, you know, like them, um, can provide.

Speaker B: I always applaud people who try and file their own return. We'll call it you done? Um, more power to you. Matter of fact, I think that it was integral into getting my father to accept my wife, that she filed her own tax return that first year because he's a small, small business cpa and he, I think, needed to know that she was going to try and do it. But in an area like this, I mean, the risk and reward are just. There's miles between the two and you really want to get it right. So I really encourage anybody to reach out for us so we can help them do that. But when you stack the two benefits right, when you stack that 21% with the fact that you can get that qualified small business stock or even a partial benefit in that short period of time, I mean, these are just amazing planning tools and everyone should be thinking about them. So, you know, one thing we haven't talked about yet is, you know, the LBA also made some changes to hemp. Is that something your practice is dealing a lot with?

Speaker A: Yes. So, uh, our clients that have hemp licenses are a little bit worried right now. So going back to the 2018 Farm Bill, hemp was Sort of separated from the definition of cannabis. And this loophole was created that it defined hemp as a certain percentage of thc. And what this did, it basically opened up this market of hemp products where beverages, gummies, topicals, all sort of products were being sold and there wasn't much regulation. They're being sold over state lines, they're being sold in convenience stores, gas stations, so widely accessible to um, a variety of, of you know, consumers and ages. What the big beautiful bill acted was they effectively closed this loophole, um, by narrowing the definition of what an intoxicating hemp product is. So this change is basically going to wipe out could be over 90% of the existing hemp market. Um, and there's, there's concern for our hemp clients. Do they, do they hang onto their hemp license? Do they maybe transition to cannabis with rescheduling coming in the future? Maybe, maybe hemp is going to be a thing of the past. So there's definitely concern right now and

Speaker B: I understand why it happened. You know, the market really exploded. It was multimillion dollar market. Maybe some of these guys transition, maybe they, they switch to cannabis, maybe they even go to a non intoxicating product. Um, but there are some bills out there that at least has been brought to my attention. Ones to delay the one year moratorium for another couple of years, ones to reverse it, maybe put in, ah, another regime to oversee. Um, remains to see. We're interested to see what's going to happen. But, um, there's certainly a lot of planning that can be done now because as of right now we're on the clock for 12 months and I know your clients are too. So we got to get in there and we got to figure out if this thing stays, what's going to happen next.

Speaker A: Yeah, yeah. So just to wrap up, what would be your advice for taxpayers and business owners trying to prioritize next steps?

Speaker B: Uh, I think that it's, it's just key to plan, right, it's key to model things out and see how they impact you. So if you're an individual and, and you've been suffering under the salt cap for a while, you know, what, what is your tax return going to look like in the future? Should you change your withholdings now that you're going to get a greater benefit? Should you reach out to your partners in your partnership and see that if a ptet election is something that's valuable for you. So we talk about that more in the partnership, uh, version of this podcast. But there is A strategy now where you can take some benefit at the partnership level of state tax payments, flow it down to the individual and you can get benefit on both ends. Maybe you still need that. Maybe you're still above the 40,000. Maybe it's something you can get rid of now that you have a higher limit. Personally, you know, there's some planning opportunities there and in the past that's been limited for some of our cannabis clients. But 280e, you know, is expected perhaps to go away if rescheduling happens. There's also been a number of changes with regards to hemp, you know, planning. Talking to your tax advisor there is going to be very important and then something like the tips even right. For an individual. I don't, I'm pretty sure it's not actually getting reported on your W2 this year. So you're going to have to take that step to plan, right? You're going to have to look at what your actual overtime was and what the incremental increase was because that's where you're going to get the benefit. So individual planning is going to be key. And then of course, you can't do individual planning without business planning. When do you want to try and accelerate depreciation deductions? When do you want to try and do other things like, you know, are you well poised to try and make an argument for qualified small business stock? So really just planning, really just starting the conversations early so you can be. That's set up for not only 25, but, you know, in the future for 26. I mean, that's, that's really the best advice.

Speaker A: Excellent. Well, great. Thank you so much for walking us through this. These thoughtful insights will definitely help help our clients and maybe potential clients for with them. So thank you for joining us and if you'd like to continue the discussion, feel free to reach out to myself or Ray. Our contact information will be available in the episode notes.

Speaker B: Thanks.