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High Growth, Higher Risk: The Business of Cannabis w/ Melissa Diaz of Highrock Accounting - AZ TRT S07 EP07 (289) 4-12-2026
High Growth, Higher Risk: The Business of Cannabis w/ Melissa Diaz of Highrock Accounting - AZ TRT S07 EP07 (289) 4-12-2026       What We Learned This Week Cannabis Companies Are Taxed on Gross Margin Because of 280E, they can’t deduct ordinary business expenses — creating massive tax burdens. Federal Classification Drives Everything Schedule I status impacts taxation, banking, regulation, and investor appetite. Many Companies Are Playing Legal Offense Some are challenging 280E aggressively, treating unpaid taxes as a strategic risk. Licensing Structure Determines Success Limited-license states create stronger economics. Unlimited states create margin compression. Consolidation Is Coming Stronger, vertically integrated, mid-sized operators are likely to dominate by 2026. Guest: Melissa Diaz https://www.highrock.co/ https://www.linkedin.com/in/melissa-k-diaz-cpa-10215623/ Melissa Diaz is a powerhouse at the intersection of accounting, strategy, and tech. As Co-Owner and CRO of High Rock Accounting (and co-founder of Rebel Rock PC, now High Rock), she leads with precision on everything from cash flow and budgeting to due diligence and audit readiness. At High Rock she helps businesses harness cutting-edge technology to make smarter, faster, fully compliant financial decisions both day-to-day and long-term. With an expertise in Cannabis and the Technology industry, Melissa’s mission is clear: empower businesses to stay competitive, compliant, and efficient in high-pressure, high-growth environments. Whether she's solving complex reporting challenges or decoding 280E, Melissa brings charisma, clarity, and confidence to the table every time.       🎙 Podcast Notes Guest: Melissa DiazTopic: The Legal, Tax & Business Reality of the Cannabis Industry Segment 1: The Federal Tax Problem (280E) The Core Issue: Federal Classification The cannabis industry’s biggest challenge isn’t demand — it’s federal law. Cannabis is still classified as a Schedule I controlled substance, meaning: ·         No accepted medical use (federally) ·         Same category as cocaine and methamphetamine Other classifications: ·         Schedule II – Highly controlled with medical use (e.g., oxycodone) ·         Schedule III – Lower control (e.g., Tylenol with codeine) ·         Over-the-counter drugs are not controlled substances. Why This Matters: Section 280E Under Internal Revenue Code 280E: ·         Cannabis businesses can only deduct Cost of Goods Sold (COGS). ·         They cannot deduct normal operating expenses. ·         This means they are effectively taxed on gross margin, not net income. Result: ·         Extremely high effective tax rates. ·         Cash flow pressure. ·         Structural workarounds. Industry Workarounds To manage tax exposure, many cannabis companies: 1.    Use Cost Segregation o    Categorize as many expenses as possible under COGS. o    Rarely challenged aggressively. 2.    Create Management Companies o    A separate affiliated entity handles: §  Admin §  Marketing §  HR §  Operations o    Charges a management fee to the cannabis entity. o    Helps shift deductible expenses outside 280E limitations. Possible Federal Rescheduling If cannabis moves to Schedule III: ·         Businesses could deduct ordinary expenses. ·         Massive financial impact. ·         Immediate improvement in profitability. Segment 2: Legal Challenges & Risk The Harborside Case ·         Legal challenge against 280E application. ·         Many companies have followed similar strategies using management entities. ·         Ongoing uncertainty. Executive Order & Medical Cannabis ·         Medical cannabis revenue represents 10–15% of total revenue. ·         38 states allow legal medical or recreational cannabis. ·         Federal inconsistency remains. Protective Filings If companies owe significant taxes (e.g., $10K+ unpaid liabilities): ·         Protective filings can preserve rights. ·         Strategic legal positioning matters. Big Question If the IRS loses major 280E challenges: ·         Could owe interest refunds to companies. ·         Significant fiscal impact. But there’s always: ·         Litigation risk ·         Opportunity cost ·         Cash flow strain during disputes Segment 3: State-Level Expansion & Industry Consolidation Florida Example ·         Recreational legalization pushed in 2024 but failed. ·         Multi-state operators (MSOs) heavily lobby for expansion. ·         Example: Trulieve and other large operators. Tax Strategy Risk Some companies treat unpaid taxes as: ·         A “loan” from the IRS ·         Betting on favorable legal rulings But risk: ·         Potential clawbacks ·         Penalties and interest Many companies are aggressively challenging 280E. Segment 4: Regulation, Licensing & Industry Structure State Regulation Differences ·         New Jersey & New England: Unified recreational frameworks. ·         Unlimited license states = oversaturation. ·         Limited license + lottery systems = high barriers to entry. Zoning Restrictions Dispensaries: ·         Cannot operate near schools or churches. ·         Subject to strict local zoning rules. ·         “Vice-style” regulation model. Vertical Integration Matters Very difficult to survive with just one vertical. Companies that control: ·         Cultivation ·         Processing ·         Distribution ·         Retail …have stronger margins and operational control. Operational Reality ·         No outdoor growing in high heat climates. ·         Indoor, climate-controlled warehouses dominate. ·         Highly regulated workforce (Facility Agent cards required). Financing Landscape ·         Real estate lending ·         Sale-leaseback arrangements ·         Hard money loans (due to banking restrictions) 2026 Industry Predictions ·         Large operators buying smaller failing companies (trend slowing). ·         Growth of mid-sized operators: o    2 states → $20–50M revenue. o    3–5 states → $100M+ revenue. ·         Continued consolidation. ·         Ongoing regulatory and tax uncertainty. Melissa’s Perspective: Being a service provider in cannabis means operating in constant uncertainty — but that’s also where opportunity lives.     Cannabis 2025 in Review: Lessons Operators Can’t Afford to Miss If your client or employer is a cannabis operator who made it through 2025, congratulations. They survived a year that separated the strategists from the dreamers, the operators from the opportunists, and the businesses built on solid fundamentals from those riding on hype alone.   This wasn't the year of explosive growth and easy money. This was the year the cannabis industry got real.   Let's break down what happened in 2025 beyond the headlines. More importantly, let’s break down what it means for the cannabis industry and you.   Article Link: HERE     Cannabis Topic: https://brt-show.libsyn.com/category/Cannabis-Hemp-Marijuana   Tech Topic: https://brt-show.libsyn.com/category/Tech   Best of Biotech from AZ Bio & Life Sciences to Jellatech: HERE   Thanks for Listening Please Subscribe to the Podcast   AZ Tech Roundtable 2.0 with Matt Battaglia The show where Entrepreneurs, Top Executives, Founders, and Investors come to share insights about the future of business.  AZ TRT 2.0 looks at the new trends in business, & how classic industries are evolving.  Common Topics Discussed: Startups, Founders, Funds & Venture Capital, Business, Entrepreneurship, Biotech, Blockchain / Crypto, Executive Comp, Investing, Stocks, Real Estate + Alternative Investments, and more…    AZ TRT Podcast Home Page: http://aztrtshow.com/ ‘Best Of’ AZ TRT Podcast: Click Here Podcast on Google: Click Here Podcast on Spotify: Click Here                    More Info: https://www.economicknight.com/azpodcast/ KFNX Info: https://1100kfnx.com/weekend-featured-shows/   Disclaimer: The views and opinions expressed in this program are those of the Hosts, Guests and Speakers, and do not necessarily reflect the views or positions of any entities they represent (or affiliates, members, managers, employees or partners), or any Station, Podcast Platform, Website or Social Media that this show may air on. All information provided is for educational and entertainment purposes. Nothing said on this program should be considered advice or recommendations in: business, legal, real estate, crypto, tax accounting, investment, etc. Always seek the advice of a professional in all business ventures, including but not limited to: investments, tax, loans, legal, accounting, real estate, crypto, contracts, sales, marketing, other business arrangements, etc.  
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