Only 27% of US marijuana companies are profitable, study finds

U.S. marijuana businesses continue to struggle to break even, let alone achieve profitability, and a new study illustrates the situation with solid data-driven numbers.

On Wednesday, Whitney Economics, a Portland, Oregon-based cannabis and marijuana economic consulting, data and research firm, announced preliminary results from its 2024 Cannabis Industry Business Conditions and Sentiment Survey, which show a troubling trend: Only about a quarter of U.S. cannabis companies are profitable, relatively consistent with similar results from the past two years, with some minor changes.

In June, a survey of businesses across the country was conducted, and analysts gathered data on the potential impact the plan to reclassify marijuana as a less restrictive Schedule III would have on small and minority-owned businesses.

On average, 27.27% of U.S. cannabis companies surveyed by Whitney Economics said they were profitable in 2024. The remaining 40.56% said they were break-even, while 32.17% said they were not profitable. The number of companies that were profitable in 2024 was down from 42.40% in 2022 but was a slight improvement from 2023, when only 24.55% of companies surveyed said they were profitable. The analysts received responses from 28 state markets, showing good representation across the country.

“You see that operators are part of this culture that is very adaptable to change,” says Whitney Economics founder and chief economist Beau Whitney, who has served as an operator, licensee and analyst, researching the market for more than 10 years. “They are very agile in changing conditions and adapting to changing business conditions, banking conditions, tax conditions, regulatory conditions. They are constantly changing and changing direction, and they To have to change direction. Because if they don’t, they won’t survive,” he says. “And they’ll either go back to the illegal market or they’ll lose not only their business but their personal assets because there’s no federal bankruptcy protection.”

The industry is also a minefield of risk. Whitney warns, for example, against loans made with personal guarantees, with high interest rates, which leads to almost predatory lending. “So when you fail in this industry, it’s not just business failure, it’s personal wealth destruction,” he says, and while the industry is amenable to change, the regulatory and legislative processes are a different story. He explained that lawmakers are focused on public health and public safety, rather than the health of operators and the health of licensees. “And so by maintaining the public safety policy,” he says, they’re not addressing the needs of licensees.

“Operators can make money regardless of how much money they actually generate,” Whitney says. “And the proof of that is 27.3% are profitable, which means 70% are either breaking even or losing money. About a third of them are losing money. That’s not a sustainable market.”

High taxes are partly responsible for the low profitability rate. According to the announcement, some cannabis businesses in the country pay an effective tax rate of 52.5%. The proposal to reclassify cannabis would lead to a reduced tax burden and increased cash flow, the company predicted.

Tax deductions—possibly transformative if marijuana is repurposed—could change everything for marijuana businesses. Right now, Section 280E of the Internal Revenue Code restrictions on marijuana businesses make it difficult to stay afloat.

“Unfortunately, many marijuana businesses continue to struggle financially as a result of the punitive tax measure known as IRC Section 280E, as well as limited access to financial services,” says Michelle Rutter Friberg, director of government relations for the National Cannabis Industry Association (NCIA). “These businesses comply with state law and deserve to be treated like any other small business in America. The elimination of 280E is just one of many reasons why the NCIA supports the Biden administration’s recent action to reclassify marijuana as a Schedule III drug.”

How does that compare to small businesses in other sectors? According to the U.S. Chamber of Commerce, 65.3% of all small businesses in the U.S. are profitable, so the cannabis industry is far behind.

“Because of the scheduling machine, because of the production of a Schedule I drug, you have a disproportionate tax burden, you can’t deduct regular business deductions from your federal taxes,” says Whitney, who says Whitney Economics doesn’t take a position on legislative efforts like the marijuana reclassification plan. “And so, even if states allow regular deductions, it doesn’t really make a big difference because of the big burden on the federal tax level.”

The cannabis industry is projected to pay an additional $2.3 billion in excess taxes in 2024 as a direct result of cannabis’ Schedule I classification. Without any changes, this excess tax burden is expected to increase to $5.2 billion by 2030. Other reports from Whitney Economics show that delinquent payments are rising as U.S. cannabis companies continue to struggle.

“If they were taxed like a normal, normal business, I would reject it,” Whitney says. “When we look at the economic impact, when we surveyed and polled business operators,” replanning would help, “because they’re in such a difficult economic situation, and a lot of that money is going to go to debt service, it’s not going to go to pay off outstanding bills to others, and then it’s going to go to reduce their debt service because of the high interest rates.”

How did minority-owned businesses fare?

The preliminary findings were included in a submission submitted by the Minority Cannabis Business Association (MCBA) to the Drug Enforcement Administration (DEA) regarding the impact the current scheduling policy has on cannabis industry operators, particularly minority-owned and small businesses.

The survey results showed that while an average of 33.7% of white cannabis entrepreneurs are profitable, only 17.5% of people of color are profitable in 2024.

“Minority communities have been disproportionately impacted,” Whitney says. “And they continue to be, despite the fact that all of these equity programs, and what we found in our research is that they don’t measure the impact. And they don’t measure the number of minority applicants, ownership, all of those things. Some of that is because they just don’t want to. And some of that is because they don’t have the permit. And so when we filed a FOIA request for the number of minority licenses that they have. A lot of them said, ‘We don’t collect the data.’ Now they don’t measure it, and as a result, cannabis policy disproportionately impacts those communities.”

Another problem is that states define minorities differently because there are overlapping communities.

In his opinion, dealing with the issue of tax burdens on cannabis businesses, especially those owned by minorities, is not the task of one entity.

“The federal government has to do A, B and C, and state regulators have to do X, Y and Z,” he says. “We’re saying something has to be done because what’s happening now is sustainable.”