Quarterly report pursuant to Section 13 or 15(d)

INCOME TAXES

v3.23.3
INCOME TAXES
 9 Months Ended
Sep. 30, 2023
Income Tax Disclosure [Abstract]  
INCOME TAXES
 16. INCOME TAXES
The following table summarizes the Company’s income tax expense and effective tax rates for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Loss before income tax
 $ (12,611) $ (57,498) $ (20,393) $ (52,428)
Income tax expense (benefit)
 $ 8,011  $ (2,802) $ 26,705  $ 9,959 
Effective income tax rate 63.5  % 4.9  % 131.0  % 19.0  %
The Company has computed its provision for income taxes based on the actual effective rate for the nine months ended September 30, 2023 and 2022 as the Company believes this is the best estimate for the annual effective tax rate. Therefore, the Company’s effective income tax rates for the three and nine months ended September 30, 2023 and 2022 are not indicative of the effective income tax rate for each respective fiscal year of 2023 and 2022. The Company’s effective income tax rate is significantly higher than the statutory income tax rates due in part to (i) disallowed expenses under U.S. Internal Revenue Code of 1986, as amended (“IRC”), Section 280E, (ii) change in liability for unrecognized tax benefits, (iii) fair value change of derivatives, (iv) interest and penalties accrual for tax liabilities, and (v) state income taxes.

Due to its cannabis operations, the Company is subject to the limitation of IRC Section 280E (“280E”) under which the Company is only allowed to deduct "costs of goods sold". This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income which provides for effective tax rates that are well in excess of statutory tax rates. In connection with the preparation and filing of the fiscal 2022 federal income tax return, the Company changed its previous application of 280E to exclude certain parts of its business. However, since the Company’s new tax position on 280E may be challenged by the IRS, the Company elected to treat the deductibility of these related expenses as an uncertain tax position. As of September 30, 2023, the balances in income tax payable and unrecognized tax benefits on the consolidated balance sheets include the impact of the new tax position on 280E, which decreased current liabilities with a corresponding increase in non-current liabilities. There was no material impact to the consolidated statements of operations and comprehensive income (loss).
The Company’s tax returns for the year 2021 and prior benefited from not applying 280E to certain entities of the consolidated group either due to the entity not yet starting operations or because the entity had a separate trade or business that was not medical or recreational cannabis operations. The Company determined that it is not more likely than not these tax positions would be sustained under examination.
As a result of the above, the Company has a liability for unrecognized tax benefits of $98,948 and $57,200 as of September 30, 2023 and December 31, 2022, respectively, inclusive of interest and penalties. Additionally, there are unrecognized deferred tax benefits of $3,442 and $3,412 as of September 30, 2023 and December 31, 2022, respectively. The Company does not expect the unrecognized tax benefits will materially increase or decrease within the next 12 months.