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: Are Uncertain Tax Liabilities the New Debt Tsunami?
- Under IRS rule 280E, U.S. Cannabis companies cannot deduct ordinary operating expenses from taxable income, resulting in high effective tax rates.
- Most major MSOs, however, including all those on the Viridian Chart of the Week, have received legal opinions under which they are expensing, but not paying, these additional taxes, accruing them under accounts called “Uncertain Tax Liabilities” (UTL) on their balance sheets.
- The aggregate amounts of these unpaid taxes are substantial, totaling approximately $2.3 billion for the companies listed on the chart.
- UTLs have become a more pressing topic as the prospects for rescheduling have risen. The IRS has continued to take a hard line on 280E taxes, saying there is no basis for nonpayment. Accordingly, in June, the IRS filed a Notice of Federal Tax Lien (NFTL) against MariMed, alleging nonpayment of assessed taxes.
- The red bars on the chart represent the uncertain tax liabilities net of cash, while the green bars indicate the company’s most recent cash position. Of the companies on the chart, only Vireo and Cresco have sufficient cash on hand to pay off their accrued but unpaid 280E liabilities.
- Moreover, two of the companies, Ascend, and IAnthus, have UTLs that exceed their market cap, while Jushi clocks in at 94% of its market cap. In terms of EBITDA, all companies with sell-side analyst estimates have more than 100% of their 2025 EBITDA in UTLs. The three highest are Jushi (341%), TerrAscend (189%), and Curaleaf (178%).
- How will UTLs be treated in a rescheduling?
- Most likely, the liabilities will cease to be accrued for periods after the effective date of S3, but they will not automatically disappear. Instead, they will remain subject to examination, settlement, or possibly lapse under the statute of limitations.
- Full year of change relief. The AICPA has requested that the IRS permit taxpayers to apply for non-280E treatment for the full year in which rescheduling becomes effective.
- Retroactive relief for prior years appears unlikely unless the IRS or Congress explicitly states otherwise.
- Viridian considers these tax liabilities to be incremental debt in our credit analysis; however, we recognize that there is precedent for negotiating past-due 280E taxes to significantly lower amounts. In 2022, StateHouse (formerly Harborside) negotiated to pay $5.8 million over 10 years on an IRS-assessed liability of $22.1 million. The deal was not a reduction in the tax but simply a realization on the part of the IRS that you can’t get blood from a turnip. The IRS is likely to reduce liabilities only in cases where it is clear that the company cannot pay the full amount.
- The IRS is unlikely to demand all the back payments at once, but it may well drive a hard bargain in negotiating down the amounts.
- Investors have been concerned about the upcoming “wall” of debt maturities in 2026. Still, they should also recognize that uncertain tax liabilities represent an equally significant potential drain on Cannabis cash. The UTLs have no hard maturity date, but the settlement of these liabilities is likely to remain an important topic in the rescheduling discussion.
