The internet is littered with writings on the relative merits of corporate forms and tax elections for cannabis businesses. Even the best of these articles are as dull as ditchwater, because the topic is tax. Most of the authors mention subchapter S taxation at some point, and the showier ones may even dredge up cannabis tax court opinions on the topic. This post doesn’t get into any of that. Instead, it asks the simple question: how did you mess up your cannabis subchapter S election?

What’s a subchapter S election?

Feel free to skip this section, which is boring, if you already know what an S election is, how it works, etc. If you don’t, I’ll cover this at a very broad, borderline irresponsible level– just to get us through. Please note that the same rules apply here for cannabis businesses as non-cannabis businesses.

An S election is just a business’s determination to be taxed according to a certain part of the Internal Revenue Code. We’re talking about subchapter S here (open to corporations and LLCs), as opposed to subchapter C (also for corporations and LLCs), or subchapter K (partnerships and LLCs only).

An S corporation passes its income, losses, deductions and credits to shareholders for federal tax purposes. Unlike a C corp, the S corp doesn’t pay federal income tax. It is a “pass through.” Note that every S corp begins its life as a C corp, and every S corp once filed something with the IRS called a Form 2553 to gain its new chapter status.

An LLC can also elect to be taxed under subchapter S. Unlike the converting C corp, the converting LLC files two forms: a Form 8832, then the 2553. People are sometimes surprised that an LLC can do this, because LLCs already pass their income, losses, etc., through to owners for federal tax purposes. But, under subchapter S, owners can often take earnings out of the business without paying employment taxes.

There are plenty of other reasons both corporations and LLCs elect to be taxed under subchapter S, either at formation or at some point during their lifecycles. I can tell you that cannabis retailers should stay away from subchapter S as a general rule. Cannabis growers and processors taxed under subchapter S are rare birds as well, but sometimes it makes sense. More on that below.

How did you mess up your cannabis subchapter S election?

I’ve had the displeasure of asking this question to clients a half dozen times over the years. That’s a very small percentage of clients at this point, but it tends to be memorable. Below are three ways this can happen.

1. Miscommunication

There’s a reason that CPAs usually ask to see a company’s governance documents before filing a tax election or preparing a return. The CPA needs to know if what they’re advising or being asked to do makes sense. Often, the ownership or structure of a company may be incompatible with subchapter S taxation. For example, a stock ledger may show non-U.S. shareholders or nonviable shareholder trusts; or an LLC operating agreement may delineate multiple classes of units.

On two occasions, I’ve designed waterfalls for cannabis LLCs only to learn those LLCs ended up making subchapter S elections. The owner agreements and tax filings were fundamentally at odds in each case. One of those busted elections came to light in litigation; the other came up when somebody left the company. Neither was satisfactorily “fixed” to my knowledge.

2. Missed deadlines

Various deadlines must be observed when electing subchapter S status. It can get pretty complicated for corporations; less so for LLCs. In my experience, founders often miss these deadlines because there is so much going on when starting a company. Late filing relief is often available, but this involves triage, extra paperwork and ultimately, expense. It’s best to calendar any tax filing deadlines upon incorporating or organizing, run down requisite tax advice, and timely file.

3. You actually made the election

Sometimes, you can mess up an S election by… timely filing an S election. Again, most cannabis businesses are not taxed under subchapter S for a reason.

In the case of a cannabis retailer, subchapter C is almost always preferred, because this prevents non-deductible expenses resulting from IRC § 280E from passing through to owners. Staying in subchapter C avoids the devastating situation of taxable income to owners on paper, but no real earnings.

Other plant-touching cannabis businesses may decline to make an S election for any number of reasons. Most commonly, a business will be capitalized disproportionately or just “differently” by co-owners (e.g., cash versus services; lots of cash versus a little cash; equity versus debt). These businesses may wish to allocate income in ways that simply can’t work under Subchapter S. Yet, they’ve made a subchapter S election with no appreciation of constraints.

You don’t have to mess up your cannabis subchapter S election

Tax is complex, but it isn’t always complicated. Roadmaps abound in the cannabis business space. If you’re a cannabis business owner looking at subchapter S, the best advice is to: 1) screen your ownership structure; 2) sketch out capital outlays and cash flows, and the way you want money to move through the business; and 3) talk to your legal and tax advisers so that everyone is on the same page. It’s no fun to mess up a Subchapter S election! But it’s also not hard to avoid.

Republican senators, including the lead GOP sponsor of a bipartisan marijuana banking bill, are gearing up to introduce new legislation designed to thwart any federal legalization of marijuana by the Food and Drug Administration (FDA) without explicit approval from Congress.

Senators Leading the Charge

The fight against potential federal marijuana legalization without congressional permission is being led by Senators Cynthia Lummis of Wyoming (R-WY) and Steve Daines of Montana (R-MT). Regarding cannabis policy, Senator Lummis has continuously defended states’ rights, firmly believing that state-by-state decisions on cannabis legalization should prevail over federal directives. She is committed to preserving state autonomy in cannabis policy, evidenced by her consistent opposition to federal legalization.

Senator Steve Daines, representing Montana, has been a prominent figure in advocating for cannabis banking reform. He plays a central role in the upcoming legislation and sponsors the SAFER Act, which addresses the pressing issue of banking access for state-licensed cannabis businesses. Daines’s dual involvement highlights his dedication to creating a safer and more legitimate financial environment for the cannabis industry while navigating the complexities of federal cannabis policy.

Senators Lummis and Daines represent a growing faction of Republicans who support states’ rights and resist excessive federal intervention in cannabis matters. Their leadership in this legislative endeavor is poised to shape the trajectory of marijuana policy in the United States, focusing on preserving states’ authority to determine their cannabis laws.

The Legislative Landscape and Implications

14 House and Senate Republicans have urged the Drug Enforcement Administration (DEA) to oppose the U.S. Department of Health and Human Services (HHS) recommendation that marijuana be rescheduled. Senators Daines and Lummis were noticeably absent from the letter’s list of signatories.

Whether restrictions on reclassifying marijuana within the Controlled Substances Act (CSA) or a specific mention of the de-scheduling of marijuana from the CSA are included in this upcoming legislation, as well as how it will prohibit the FDA from potentially legalizing marijuana, are all unknowns. In most cases, “legalization” refers to excluding marijuana from the CSA.

While the FDA has endorsed a cannabis-derived CBD medication and a synthetic THC drug, it generally refrains from endorsing holistic or plant-based remedies. If the HHS suggested rescheduling marijuana, it would remain federally prohibited, except for medical use with a doctor’s prescription.

Efforts to obtain further details regarding this impending bill were made, with a spokesperson for Senator Daines directing inquiries to Senator Lummis’s office. However, immediate responses from the latter’s representatives were unavailable.

This announcement was appended to the statements about the SAFER Banking Act introduced on Wednesday. Senator Daines emphasised provisions within the SAFER Banking Act that he helped secure during bipartisan negotiations, designed to shield all legal enterprises from what he perceives as the “woke agenda” of the left.

While the primary focus of the SAFER Banking Act revolves around granting state-licensed cannabis businesses access to conventional financial services, Senators Daines and Lummis highlighted aspects of the legislation intended to prevent federal regulators from taking discriminatory enforcement actions against other sectors, such as the firearms industry.

Senator Lummis contended that Wyoming energy companies frequently face threats from “woke” Environmental and Social Governance (ESG) initiatives, potentially jeopardising their access to banking services and loans. The SAFER Banking Act prevents federal bank regulators from compelling banks or credit unions to terminate accounts based on reputation risk, safeguarding energy firms and gun manufacturers from left-wing challenges to their operations.

Senator Daines’s focus on the bill’s banking regulations provisions and his sponsorship of FDA and marijuana legalization legalization  could suggest an attempt to distance himself from the broader marijuana reform movement, notwithstanding his state’s 2020 ballot approval of adult-use legalization.

The SAFER Banking Act is expected to have strong bipartisan support in committee and on the floor, according to individuals like Sherrod Brown, the chairman of the Senate Banking Committee and Chuck Schumer, the majority leader of the Senate (both Democrats). When the legislation reaches the Senate floor, Schumer plans to attach amendments to enable state-level cannabis expungements and support firearms rights for medicinal cannabis patients; Senator Daines has previously expressed openness to this strategy.

On the House side, a well-known Democrat proposed a plan to legalize, tax, and regulate marijuana on a federal level. The bill also included provisions for expunging earlier convictions for cannabis usage.

The Stance of the FDA and Challenges Ahead

Historical FDA Caution: Over the years, the FDA has maintained a cautious stance regarding cannabis, especially its natural, plant-based form. While the agency has approved specific cannabis-derived medicines, it has hesitated to endorse broader cannabis legalization or rescheduling. Instead, the FDA’s primary focus has been on ensuring the safety and efficacy of medical treatments, resulting in a reluctance to embrace holistic or plant-based remedies like marijuana.

Federal Prohibition and HHS Advice: The problem has become more complicated due to the recent HHS (Health and Human Services) suggestion to reschedule marijuana. Acceptance of this recommendation could result in modifications to the Controlled Substances Act’s (CSA) federal classification of marijuana. To be clear, marijuana will likely continue to be federally illegal for recreational use even if it is rescheduled, except for medical uses that a doctor has approved.

Challenges and Uncertainties: The impending legislation championed by Senators Lummis and Daines faces numerous challenges and unresolved issues. Key questions remain, including whether the bill will specifically address rescheduling or de-scheduling marijuana within the CSA and how it intends to prevent the FDA from pursuing marijuana legalization without Congress’s explicit approval. The term “legalization” typically implies removing marijuana from the CSA, a significant step toward federal acceptance. The lack of detailed information about the bill’s mechanics leaves critical aspects, such as preserving states’ rights in shaping cannabis laws, uncertain. In this intricate landscape, the FDA’s regulatory stance and adaptability to evolving perceptions of marijuana will play a pivotal role. While Senators Lummis and Daines advocate for legislative measures to safeguard state autonomy, scrutiny of the FDA’s approach to marijuana will continue among stakeholders in the cannabis industry and beyond. As the legislative process unfolds, the complexities and challenges of federal cannabis policy reform will come to the forefront, ultimately shaping the future of marijuana legalization in the United States.

Bottom Line

As Senators Lummis and Daines lead the charge against potential federal marijuana legalization without congressional approval, the role of the FDA looms large in this unfolding legislative battle. While historical caution from the FDA persists, recent recommendations from the HHS add complexity to the cannabis landscape.

This legislative effort faces various difficulties, including uncertainties about the bill’s details and how it will protect states’ rights. As the FDA’s regulatory stance continues to be a significant component, the future of marijuana legalization in the United States will be formed by a complicated interplay of federal and state authorities and changing attitudes toward cannabis. The road ahead promises to be both complicated and transformational, with big changes in federal cannabis legislation possible.

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Ah. Altered states of consciousness. For those of us who have experienced it in our lifetime, it’s definitely one of the best things about being human.

These altered states of consciousness simply refer to times when we have mental states that are not ordinary; there are moments when our sense of time and space is distorted due to pleasure, psychedelics, meditation, sexual intercourse, and much more. These days, there has been a lot of interest going on in the world of psychedelics, given that psilocybin as well as ketamine, LSD, and other hallucinogenic drugs are having a second heyday.

Altered states of consciousness can also be called many different things. To other people, these are mystical experiences, a form of ego dissolution, a trip down the rabbit hole, an awakening, a metaphysical experience… the list goes on. But what exactly goes on in the brain?

Despite the growing body of studies and clinical trials done, we still know very little about psychedelics and how they induce altered states of consciousness, which are oftentimes a precursor to healing, therapeutic experiences, and even recreation. Generally speaking, altered states induce significant changes in cognition, time and space perception, and even visions. That said, the altered states of consciousness brought about by psychedelic use are so varied from one person to another, that it can hardly be standardized or pinned down.

This has piqued the curiosity of researchers for a long time.

And recently, a group of investigators had some success in identifying what occurs in the brain when we consume psychedelics, which leads to altered states of consciousness. This groundbreaking study was conducted by researchers from Sweden’s Lund University.

For this study, researchers used live rats as well as a technique they developed to measure electrical signals taken from 128 various parts of the rats’ brains all at the same time. This was done by implanting arrays with microelectrodes and wires into different regions of the brain. The arrays were critical in allowing the researchers to measure local field potentials (LFPs), which are electrical signals taken from thousands of neurons.

Additionally, various psychoactive substances were injected into the rats. This included ketamine, LSD, phencyclidine, and DOI.

“Consciousness is one of those fundamental questions that have always fascinated me. I think that psychedelics is a great tool to study the neural basis of consciousness in laboratory animals, since we share most of the same neural ‘hardware’ with other mammals,” explains Par Halje, study author. Halje is also a neurophysiology researcher and cognitive scientist at Lund University.

They found some fascinating results, most especially the fact that high-frequency oscillations were taking place at the same time in different parts of the brain. They recorded signals from different brain regions that were almost in sync, though delays occurred that were under a millisecond. The one-of-a-kind synchronization was a surprising discovery for the researchers.

“We assumed that a single brain structure was generating the waves and that it spread to other locations,” Halje told Psypost. “But instead, we saw that the waves went up and down almost simultaneously in all parts of the brain where we could detect them – a phenomenon called phase synchronization.” This meant that even though the brain cells were acting differently when exposed to different psychedelic drugs such as ketamine and LSD, it had an impact in the greater activity affecting brain communication, resulting in quick and synchronized signals.

“One might think that a strong wave starts somewhere, which then spreads to other parts of the brain,” explains Halje. “But instead, we see that the neurons’ activity synchronises itself in a special way – the waves in the brain go up and down essentially simultaneously in all parts of the brain where we are able to take measurements,” says Halje. “Likely, this hyper-synchrony has major effects on the integration of information across neuronal systems and we propose that it is a key contributor to changes in perception and cognition during psychedelic drug use,” write the authors.

Other Studies

This area of study is still so mysterious, but the theories we have today are no less as interesting than the phenomenon itself.

Aside from the Lund University study, there have been other efforts to understand what goes on when we get high on psychedelic drugs and go into non-normal mental states. The exact process that occurs when our consciousness gets transported to another dimension may not be clearly understood yet, but a lot of it has to do with 5-HT2A, a serotonin receptor. Many psychedelics including psilocybin, ayahuasca, and LSD activate this receptor upon consumption so using chemicals to block 5-HT2A binding locations will nullify its effects.

One study in particular found that when people consumed LSD, they experienced a blurring of boundaries with other people. When the 5-HT2A receptors were blocked using ketanserin, this effect was nullified. “The real tell-tale, or at least the most impressive nature of a mystical experience, is having this notion of oneness where the sense of subject and object break down,” explains Dr. Matthew Jonson, a behavioral science and psychiatry professor at Johns Hopkins University.

Conclusion

Psychedelics are unique in their ability to interrupt otherwise normal processes in the brain – for the best. Because of that, no other substance on earth can match psychedelics’ ability to help humans heal from a myriad of mental and emotional conditions. How that happens is still largely not understood, but we’re all here for it. Let’s see what the upcoming studies on psychedelics and altered states of consciousness have to say.

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