Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

14.   INCOME TAXES

On January 1, 2018, the Company, through a tax-free transfer under IRC Section 351, transferred ownership in GTI-Clinic Illinois Holdings, LLC (taxed as a partnership) to GTI Core, LLC (taxed as a “C” corporation). As a result of the transaction, the Company now accounts for income taxes in accordance with ASC 740—Income Taxes, under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and the respective tax bases.

Taxable income is computed for GTI Core, LLC and its respective LLC ownership interests up through the RTO date of June 12, 2018 and for all subsidiaries from this date forward. Effective with the Company’s reverse takeover transaction on June 12, 2018, all subsidiaries have elected to be taxed as “C” corporations.

Green Thumb Industries Inc. is organized in Canada but maintains all of its operations in the United States. Due to this inverted entity structure, the Company is subject to both US and Canadian taxation, however the Company has no operations in Canada and thus files a nil return with the Canadian tax authorities.

For the years ended December 31, 2020, 2019 and 2018, income taxes expense consisted of:

	Year Ended December 31,
	2020			2019			2018
Current:
Federal	$	65,118,212		$	18,095,946		$	2,842,696
State		16,640,086			4,665,000			279,899
Foreign		—			—			—
Total Current		81,758,298			22,760,946			3,122,595
Deferred:
Federal		3,520,293			(12,535,000	)		3,330,000
State		(1,425,789	)		(881,913	)		731,000
Foreign		—			—			—
Total Deferred		2,094,504			(13,416,913	)		4,061,000
Total	$	83,852,802		$	9,344,033		$	7,183,595

The difference between the income tax expense for the years ended December 31, 2020, 2019 and 2018 and the expected income taxes based on the statutory tax rate applied to pre-tax earnings (loss) arises as follows:

	2020			2019			2018
Income/(Loss) before Income Taxes	$	102,930,722		$	(50,202,837	)	$	29,751,374
Statutory Tax Rates		21	%		21	%		21	%
Expense/(Recovery) based on Statutory Rates		21,615,452			(10,542,596	)		6,247,788
Pass-throughs and Non-controlling Interests		—			49,203			(1,062,111	)
State Taxes		14,836,807			(1,536,694	)		(279,899	)
Provision to Return Adjustment		5,299,091			(1,209,592	)		53,304
Adjustments for Stock Compensation		(211,132	)		(1,952,083	)		—
Non-deductible Expenses		27,570,364			14,166,223			2,263,978
Change in State Rate Reconciliation		(2,535,415	)		513,338			—
Change in Valuation Allowance		7,705,790			7,604,098			—
Change in Uncertain Tax Position		9,918,112			2,113,263			—
Other Differences		(346,267	)		138,873			(39,465	)
Income Tax Expense	$	83,852,802		$	9,344,033		$	7,183,595

Income taxes paid for the years ended December 31, 2020, 2019 and 2018 were $72,574,675, $18,510,094 and $2,879,010, respectively. 

As the Company operates in the cannabis industry, it is subject to the limitations of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.

Deferred taxes are provided using an asset and liability method whereby deferred tax assets are recognized based on the rates at which they are expected to reverse in the future. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. The effect on deferred tax assets and liabilities of a change in tax law or tax rates is recognized in income in the period that enactment occurs. 

At December 31, 2020 and December 31, 2019, the components of deferred tax assets and liabilities were as follows:

	Year Ended December 31,
	2020			2019
Deferred Tax Assets
Operating Lease Liabilities	$	33,641,132		$	10,483,126
Net Operating Losses		13,236,414			12,997,199
163(j) Interest Limitation		5,481,144			—
Warrant Fair Value Derivative		5,251,087			—
Stock-based Compensation		7,096,512			4,592,242
Other		3,453,748			519,437
Valuation Allowance		(17,033,118	)		(7,604,098	)
Total Deferred Tax Assets		51,126,919			20,987,906
Deferred Tax Liabilities
Operating Right of Use Assets	$	(31,211,307	)	$	(10,176,807	)
Fair Value Investments		(7,734,744	)		(1,080,760	)
Intangibles		(37,398,110	)		(43,896,437	)
Total Deferred Tax Liabilities		(76,344,161	)		(55,154,005	)
Net Deferred Tax Liabilities	$	(25,217,242	)	$	(34,166,099	)

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We assess the positive and negative evidence to determine if sufficient future taxable income will be generated to use the existing deferred tax assets. A valuation allowance in the amount of $17 million is maintained as of December 31, 2020.

As of December 31, 2020, we had $57 million of gross federal net operating loss carryforwards which will not expire. Additionally, the Company had $18 million of gross state net operating loss carryforwards, if not claimed, begin to expire in 2031. Our evaluation of evidence resulted in management concluding that the majority of our net operating losses will not be realized.

Pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization.

The Company operates in a number of tax jurisdictions and are subject to examination of its income tax returns by tax authorities in those jurisdictions who may challenge any item on these returns. Because the tax

matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain. In accordance with ASC 740—Income Taxes, the Company recognizes the benefits of uncertain tax positions in our consolidated financial statements only after determining that it is more likely than not that the uncertain tax positions will be sustained.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance as of December 31, 2018	$	—
Additions for current year		1,720,865
Additions for prior year		392,398
Subtractions for current year		—
Balance as of December 31, 2019	$	2,113,263
Additions for current year		7,536,097
Additions for prior year		2,382,014
Subtractions for current year		(1,690,986	)
Balance as of December 31, 2020	$	10,340,388

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2020 and 2019, we recognized $554,000 and an immaterial amount of interest and penalties, respectively. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months. We file income tax returns in the United States, various state jurisdictions, and Canada, which jurisdictions have varying statutes of limitations. The U.S. federal statute of limitation remains open for the 2016 tax year to the present. The state income tax returns generally remain open for the 2016 tax year through the present. Net operating loss arising prior to these years are also open to examination if and when utilized.