Psychedelics Companies in Oregon Will Have to Grapple With 280E – Business Insider

For years, US cannabis executives have protested a law that they say is obscure and outdated, and that makes it hard for them to turn a profit.

The law, a section of the federal tax code known as 280E, could now hamper psychedelics companies that want to enter the first state market for magic mushrooms in the US, similarly to how it affects cannabis firms.

Congress passed 280E to aid President Ronald Reagan's war on drugs. The law prohibits companies that illegally sell Schedule I and Schedule II drugs from deducting regular business expenses like office supplies or health-insurance premiums. Effectively, those companies have to pay more in taxes. Because cannabis and psilocybin are federally illegal, 280E affects businesses even in areas where the substances are locally legal.

Psychedelics companies haven't had to contend with the tax-related hassles associated with 280E because they've focused on pharmaceutical research and development or conducted their business in countries where the drugs aren't federally prohibited.

But now, as Oregon prepares to create the first legal-psychedelics market in the US, many psychedelics companies will have to grapple with the complicated tax implications for the first time.

According to Harris Bricken, an international law firm, psilocybin businesses in Oregon could face challenges like those that cannabis companies faced. Because psilocybin is illegal under federal law, it will likely be difficult for the companies to find banks or credit unions to work with them. It also makes securing funding more difficult.

Sam Chapman, the executive director for the Healing Advocacy Fund, a nonprofit focused on the implementation of Oregon's psilocybin program, told Insider that he expects the 280E tax issue to catch a lot of operators by surprise.

"There's still a pretty big cloud around how to successfully manage a 280E tax liability," he said.

Dina Burkitbayeva, a cofounder of Psymed Ventures, a psychedelics-focused venture-capital firm, said 280E would make doing business extremely challenging for a lot of the companies in Oregon, therefore making it difficult for investors like herself to deploy capital in the state.

"You're really not running a very sexy business," she said. "We're excited that these efforts are happening in Oregon, but from a venture-investment standpoint, we're not really seeing a lot of opportunity."

Mason Marks, an attorney who was the chair of the licensing subcommittee for Oregon's Psilocybin Advisory Board, said he expects 280E to affect most, if not all, of the psychedelics companies looking to operate in Oregon. He added that bigger businesses able to scale would have an advantage.

"Those are the ones that are going to be the most profitable, because the tax situation is really eating into your profits," Marks said. "You need to operate at a certain scale that keeps your overhead down."

Marks said operators from the cannabis industry would also have an edge because they've dealt with the same law.

It's still unclear which companies in Oregon 280E would directly affect. While cultivators who grow the mushrooms would undeniably be subject to the law, it likely would not affect data companies and other ancillary businesses.

Startups focused on training practitioners may also be exempt, though that may depend on whether the state's training criteria require training firms to supply psilocybin to trainees.

Elana Tamas, a tax advisor at the New York accounting advisory firm Anchin who has helped cannabis companies navigate 280E for years, said companies working with cannabis or psilocybin could restructure to limit the harm of 280E.

If a psychedelics-retreat firm, for example, can prove that its psilocybin-administering operation is separate from the retreat operation, it would be able to file separate taxes for those two entities. In this case, only the company that administers psilocybin would face elevated taxes.

"It's an analysis that you have to make based on what the economic realities are, so it's not something that you can just say and create. It's something that really needs to be economically true," Tamas said. "There really needs to be a really strong paper trail to support the differentiation between the expenses relating to one business and the income relating to one business."

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Psychedelics Companies in Oregon Will Have to Grapple With 280E - Business Insider