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: ·