INCOME TAXES |
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2024 and 2023:
The Company has computed its provision for income taxes based on the actual effective rate for the three and nine months ended September 30, 2024 and 2023 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, 2024 and 2023 are not indicative of the effective income tax rate for each respective fiscal year of 2024 and 2023. The Company’s effective income tax rate is significantly higher than the statutory income tax rates due in part to (i) an increase in the uncertain tax position liability due to tax positions based on legal interpretations that challenge the Company’s tax liability under IRC Section 280E (“280E”), (ii) interest and penalties accrual for tax liabilities, and (iii) state income taxes.
The IRS has taken the position that cannabis companies are subject to the limitation of 280E, a position held by state tax regulators in Nevada, Ohio and Virginia. Under the IRS’s interpretation of 280E, cannabis companies are only allowed to deduct expenses directly and indirectly related to the production of inventory.
In July 2024, the state of Pennsylvania enacted legislation permitting medical cannabis cultivators to deduct ordinary and necessary business expenses for state income tax purposes, which are disallowed under 280E. This legislation was effective July 1, 2024, and applies to tax years beginning after December 31, 2023. The legislation was also meant to include dispensary licensees, but were unintentionally left out of the initial legislation. This oversight was corrected with new legislation in October 2024. As of September 30, 2024, the tax balances reflect the law as enacted at that time, and uncertain tax positions have been recorded for our Pennsylvania dispensaries related to the entities’ 2024 activity. The Company estimates that the inclusion of dispensary licenses will result in the release of $3,266 of uncertain tax position liabilities in the fourth quarter.
In connection with the preparation and filing of the fiscal 2022 income tax return, the Company changed its previous application of 280E to exclude certain parts of its business. In regards to fiscal years 2023 and 2024, the Company has taken the position that it does not owe taxes attributable to the application of 280E. However, since the Company’s tax positions on 280E may be challenged by taxing authorities, the Company elected to treat the deductibility of these related expenses as an uncertain tax position. As of September 30, 2024, the balances in income tax payable and unrecognized tax benefits on the consolidated balance sheets include the impact of the tax position on 280E, which decreased current liabilities with a corresponding increase in non-current liabilities. There is no material impact to the consolidated statements of operations and comprehensive income (loss).
The Company has a liability for unrecognized tax benefits of $136,088 and $100,343 as of September 30, 2024 and December 31, 2023, respectively, inclusive of interest and penalties. The Company anticipates that it is reasonably possible that its new tax position on 280E may require changes to the balance of unrecognized tax benefits within the next 12 months. However, an estimate of such changes cannot reasonably be made.
The total amount of interest and penalties related to the liability for unrecognized tax benefits recorded in income tax expense during the three and nine months ended September 30, 2024 was $2,618 and $7,070, respectively. The total amount of interest and penalties related to the liability for unrecognized tax benefits recorded in income tax expense during the three and nine months ended September 30, 2023 was $2,569 and $5,583, respectively.
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