Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Viridian Capital Chart of the Week: Will 280E Concerns Really Go Away After Rescheduling?
- The Viridian Chart of the Week explores the Uncertain Tax Liabilities (UTLs) of eight large MSOs. UTLs are the long-term liability account where MSOs accrue their expensed but unpaid 280E tax liabilities. The amount of these liabilities continues to grow, and the companies on the Chart have a current aggregate of $2.1 billion on their balance sheets.
- The Chart examines two methods for assessing the size of tax liabilities. The orange line measures the YTD net additions to UTL’s relative to Cash Flow from Operations, and the green bars depict the UTLs on each company’s balance sheet relative to their consensus 2026 EBITDA.
- The orange line indicates that approximately 104% of the YTD cash flow from operations for the companies on the Chart would be eliminated if the companies were actually paying the tax expense they report on their income statements. Aggregate cash flow from operations for the YTD period would be negative for the companies on the Chart. Some companies, like Jushi and Verano, would have sharply negative cash flow from operations if they were paying their 280E taxes. Note that the orange line is missing on Vireo because Vireo shows a negative CFFO on its June 10-Q (Q3 not yet filed), even after accruing 280E taxes.
- The green bars represent the balance sheet amounts of 280E liabilities in relation to consensus 2026 EBITDA. There is a wide range of values, ranging from .5x for Vireo up to 3x for Jushi, with an aggregate average of 1.3x.
- What happens to these accrued liabilities when, and if, 280E is eliminated? One outcome seems exceedingly unlikely to us – that these liabilities will be erased and forgiven. That doesn’t seem to be in the IRS DNA.
- Another popular speculation is that they will be negotiated out at pennies on the dollar. Proponents of that viewpoint cite the 2022 settlement between Harborside and the IRS, wherein Harborside agreed to pay $5.8 million on a claimed liability of $22 million, with scheduled payments of $50k per month. Advocates of this position overlook the fact that the IRS settled this as a collection matter; they never forgave the debt, but recognized that it was tantamount to getting blood from a turnip, as Harborside was too broke to pay much. The lesson here is that companies like those on the Chart are unlikely to get a deeply discounted settlement amount.
- The most likely case is that some of this debt will drop off due to the statute of limitations. The IRS has three years from the original due date of the return to assess a tax. We will likely be approaching some deadlines by the time 280E is eliminated, and companies may be looking to run out the clock.
- The magnitudes of the liabilities, however, suggest that the IRS should institute a multi-year payment plan. After all these liabilities average 1.4x EBITDA, which would be impossible to pay in one year in the ordinary course of business.
- For investors and potential acquirers, 280E will not make a swift exit. It will be an important due diligence concern for years to come.
