HBK has been recognized as a Best Place to Work in New Jersey by NJBIZ, a weekly business journal covering the state’s business activity for business leaders and executives. The 2024 NJBIZ Best Place to Work honorees were announced on June 28.

The NJBIZ survey, conducted by BridgeTower Media’s Best Companies Group, honors small (15 – 49 employees), medium (50 – 249 employees), and large (more than 250 employees) employers based on input from those companies’ employees. The program administrators confidentially collect data, allowing workers to share feedback about their employers, and, notes NJBIZ, “for those companies to learn from and act on that knowledge.”

HBK’s selection came in the “large company” category. The firm has also been recognized in Florida, Ohio, and Pittsburgh as a best place to work in 2024.

“We are honored to be recognized as a Best Place to Work in New Jersey,” noted HBK Mid-Atlantic Region Principal-in-Charge and CEO-Elect Thomas M. Angelo, CPA, CITP. “Our team members are our most important asset, and cultivating an environment where they can grow professionally while balancing their work and personal lives has always been a priority for us. I’m proud of our team for their commitment to our culture, our clients, and most of all, each other.” 

HBK, an Accounting Today magazine Top 50 U.S. CPA firm, operates from 16 offices in five states, including two New Jersey offices in Holmdel and Cherry Hill. It recently moved its Mid-Atlantic regional headquarters into Holmdel’s historic Bell Works. To reach the HBK office in Holmdel, call (732) 381-8887.

“Owners”—not the trust—to pay income tax on trust income

According to new legislation signed into law by Governor Josh Shapiro on December 14, 2023, the income generated in an irrevocable grantor trust in Pennsylvania will no longer be taxed to the trust or its beneficiaries, but as personal income to any person treated as an owner of the trust, regardless of whether or not distributions are made. The related reporting and filing requirements are effective for tax years beginning in 2025.

In effect, the law transfers the responsibility of reporting and settling the tax away from a trust with a grantor-type structure and its beneficiaries to the grantor or any other individual treated as an owner under federal grantor trust rules.

Prior to this amendment to its income tax code, Pennsylvania was the only state that did not acknowledge an irrevocable grantor-type trust, even though it acknowledged revocable grantor trusts. That created a disparity in reporting requirements. At the federal level, the grantor or anyone treated as an owner of the trust reported all income associated with the trust whether or not it was distributed to them. But, at the state level, the trust was taxed on undistributed income; the beneficiaries, on income they received. The incongruity imposed administrative challenges and impeded efforts in estate planning.

What is the Beneficial Ownership Information Reporting Requirement?

• In 2021, the Corporate Transparency Act was enacted to provide beneficial ownership information (BOI) to the U.S. Treasury Financial Crimes Enforcement Network (FinCEN). This is part of the U.S. government’s efforts to counteract money laundering and other such illegal activities and identify shell companies.
• It is estimated that 32.6 million companies will be required to disclose information regarding their “beneficial owners.”
• These filings will be available upon approved request to federal, state, local, and tribal officials for authorized activities related to national security, intelligence, and law enforcement. For limited applications, this information can also be made available to financial institutions.

Who is required to file?

Companies are required to report BOI information when they meet the definition of a “reporting company” and do not qualify for an exemption. A domestic reporting company would generally include a corporation, limited liability company (LLC), and companies created by filing documents with a secretary of state, such as a limited liability partnership, business trust, and other limited partnerships. The term “foreign reporting company” generally includes entities formed under the law of a foreign country and registered to do business in any U.S. state.

Who is exempt from filing?

There are currently 23 listed exemptions, including exemptions for SEC-registered entities, banks, credit unions, investment companies and advisors, insurance companies, and tax-exempt entities. See the complete list from FinCEN here.

An exemption is also available to a “large operating company,” generally defined as a company with a physical office in the U.S., more than 20 full-time employees, and more than USD 5 million in gross receipts or sales from U.S. sources.

When are filings due?

• Reporting companies created or registered to do business in the U.S. prior to January 1, 2024, are required to file an initial report by January 1, 2025.
• Reporting companies created or registered to do business in the U.S. on or after January 1, 2024, must file an initial report disclosing the identities and information regarding their beneficial owners within 90 days of creation or registration.
• Reporting companies created or registered to do business in the U.S. on or after January 1, 2025, must file an initial report disclosing the identities and information regarding their beneficial owners within 30 days of creation or registration.
• Once the initial report is filed, an updated BOI report must be filed within 30 days of a change in their beneficial ownership.

Who is a beneficial owner of a reporting company?

A beneficial owner is any individual who either directly or indirectly:

• Owns or controls at least 25% of a reporting companies ownership interest
• Exercises substantial control over a reporting company

What are the potential risks of not filing?

• A person who willfully violates the BOI reporting requirement is subject to a civil penalty of up to $500 per day.
• Additionally, there is the potential for a criminal penalty of up to $10,000 and up to two years of imprisonment.
• These penalties can be assessed to both the filer of the BOI report and anyone who willfully provides the filer with false information.

Who should we contact to assist in determining if a filing is required?

• Unfortunately, the process of determining if a company has a reporting requirement and the filing of the BOI is considered the practice of law; as a CPA firm, HBK is unable to assist in determining filing requirements and/or filing the BOI report.
• We recommend seeking the advice of your preferred attorney or we can make a recommendation.
• Many registered/statutory agents can assist with the filing as well.
• You can also file the reports yourself at the FinCEN’s BOI E-Filing website at no cost.
• The FinCEN website also contains a comprehensive FAQ section and helpful resources.

If you have questions or need assistance, please contact your HBK representative.

The year 2024 could be witness to a major regulatory change for cannabis. Federally, the push for cannabis to be rescheduled from a Schedule I drug to a Schedule III drug will continue its forward momentum.

An August 2023 letter from the U.S. Department of Health and Human Services (HHS) contains a recommendation to reschedule cannabis to Schedule III, a classification designating a drug has a medical use but requires a prescription. With its recommendation, then, the HHS is indicating that cannabis has an accepted medical use, among other things that support rescheduling. The recommendation has the potential to begin a shift in the national perception of the cannabis industry as well as allow cannabis-oriented businesses access to benefits not previously available to those businesses.

The HHS recommendation is just the start of this journey; there are multiple roadblocks to advancing their decision, including that the Drug Enforcement Administration (DEA) would have to agree with the recommendation. The decision would also be subject to the Administrative Procedures Act, which would give the public and the court system the opportunity to weigh in on rescheduling. Additionally, the Food and Drug Administration (FDA) would likely provide guidelines or subject cannabis to existing regulatory authority. As such, the rescheduling process could continue into 2025. Still, slow progress is forward progress for our budding industry.

What would this rescheduling mean for canna-businesses?

Cannabis currently is classified as a Schedule I drug, a classification for drugs that have the most potential for abuse and no acceptable medical uses. As such, the cultivation, distribution, and use of cannabis is illegal under federal law and subject to Section 280E of the Internal Revenue Code (IRC) which prohibits the deduction for tax purposes of otherwise normal expenses that businesses in other industries are allowed to take. Rescheduling to Schedule III would imply a lower level of federal restriction, which could have several positive implications for canna-businesses:

Access to tax deductions and a reduced tax burden

Probably most significantly, IRC Section 280E would no longer apply. As in other industries, normal business expenses would be deductible on canna-businesses’ federal tax returns. The inability to take advantage of these deductions has prevented businesses, from small retail stores to large multi-state operators, from maximizing their profitability due to a large tax liability. With access to a broader range of deductions, canna-businesses would be looking at a substantial reduction in their overall tax burden, from hundreds to millions of dollars. Absent legislative or judicial relief, taxes paid in prior years with IRC Section 280E in effect are unlikely to be refunded and unpaid taxes from those years are still likely to be owed. With rescheduling potentially on the horizon, businesses need to keep abreast of changes in tax regulations to optimize their deductions as well as maintain compliance with any new regulations.

Potential for growth and investment

Rescheduling to Schedule III would likely attract more outside investors to the cannabis industry as they could expect reduced risk due to federal illegality for canna-businesses. Increased outside investment could help fuel business expansion as well as research and development and infrastructure improvements. Rescheduling could cause the market exchanges, including Nasdaq and the NYSE, to re-evaluate their position on companies to be listed on their exchanges, which would allow for more visibility for companies in the industry currently ineligible for listing. To capitalize on the wider-reaching potential for growth, businesses would need to make both in-house and in-market adjustments. Given the potential for a larger consumer base, which will inevitably shape consumer trends, businesses must prepare to alter their financial strategies. With the federal rescheduling of cannabis, business could expect new investors and/or diversified partnerships, not only for canna-businesses but across a variety of industries. Considering these opportunities, businesses would need to maintain awareness of the evolving investment landscape in order to optimize their potential in this changing market.

Access to banking services

Many cannabis businesses currently face challenges when it comes to accessing traditional banking services due to the imposed federal restrictions. As it stands, there is significant gray area in banking operations due to the disparity between states where marijuana is legal and the current federal status as a Schedule I drug. Rescheduling to Schedule III could lead to improved access to banking services, allowing businesses to manage finances more efficiently and fairly. It could also lead to widespread access to merchant services to help process transactions; currently, even though most operators have a depository relationship, they are still collecting a tremendous amount of cash as most major service providers will not work with canna-businesses.

Moving away from a historically cash-heavy system would enhance both financial security and transparency among the businesses, thus lowering, or removing, the current legal, operational, and regulatory risks for both bank and business. Given this potential shift, businesses would need to prepare for federal regulation that would clear the smoke between the industry and banking access.

Impact at the state level

Rescheduling could push the government to be proactive and establish a regulatory framework for interstate commerce, which could lead to businesses running more efficiently and using their capital in a more beneficial way as there would no longer be a need for duplicate facilities from state to state. It would also allow businesses with a specialized product to reach across state lines into larger markets. On the flip side, if the proper framework is not put into place, products from other states could over-saturate a market in an already difficult business climate. States will also want to protect their own cannabis industries, so they would likely impose import and export tariffs as well as interstate commerce taxes.

Rescheduling would result in a newly evolving framework of legal and financial practices, which will provide both challenges and opportunities for cannabis businesses. Navigating this framework will require advisement to ensure compliance at both state and federal levels. By navigating this framework, businesses could optimize their potential while minimizing risk and avoiding legal and financial complications, thus anticipating long-term success.

With the possibility of rescheduling on the horizon, it is all but certain that state regulators will reevaluate existing policies and procedures, the federal government will increase oversight and compliance requirements, and the way cannabis business operate will undergo a seismic shift. In this ever-changing world of cannabis, the experts at HBK Cannabis Solutions, who have been helping cultivators, manufactures, and retailers navigate the evolving landscape of tax, finance, financial reporting, and business management tools for nearly a decade, are here to support your canna-business. We look forward to the opportunity to answer any questions and continue the dialogue on this exciting industry.

For more information, contact HBK Cannabis Solutions at Matt Gannon at mgannon@hbkcpa.com.