For Psychedelic Businesses, Sometimes Survival Comes Before Growth

I recently spoke with the owner of a licensed psilocybin service center here in Oregon who opened her business last year.

Like many people we meet in this industry, she did not get into psychedelics because she thought it was going to make her rich. She believes in the medicine and believes people should have access to it.

But like most people who start a business, they have a reasonable expectation that, if they do a good job, they will, at minimum, make a modest living or, at best, secure a little financial freedom.

Unfortunately, as with almost all of the clients we have worked with in the psychedelic industry over the last few years, she quickly discovered that the industry has very real limitations.

Here at Calyx, we have been working with the cannabis industry for well over a decade, and although some people got into it because they believed in the medicinal benefits of cannabis, most were jumping in to take advantage of the green rush. Although cannabis is riddled with its own barriers (banking, license limitations, being federally illegal, and no interstate market), fortunately for them, it does have the potential for an almost unlimited upside.

For example, a dispensary sells a product. If demand doubles and the business has the inventory, staff, and systems to accommodate it, it can sell twice as much product. A successful product business can continue increasing sales without increasing its physical footprint or labor at the same rate.

A psilocybin center sells something much more finite: time and space.

In Oregon, a client must complete a preparation session, consume psilocybin at a licensed service center in the presence of a licensed facilitator, and remain there for the required session length, followed by an integration session. Each client therefore requires both a facilitator’s time and dedicated space, creating a natural limit on how many clients a service center can serve.

There are only so many rooms in the building. There are only so many hours in the day. There are only so many administration sessions a facilitator can supervise. That caps the business’s potential cash flow.

There is another crucial limitation: the better the outcome, the less likely the client is to return.

Unlike talk therapy or other service businesses that can depend on clients returning week after week, someone may have a profound experience with psilocybin and not return for months, years, or even a lifetime.

That is obviously a great outcome for the client and speaks to the potential value of the medicine. But from a business standpoint, it creates another challenge: psilocybin centers cannot necessarily rely on recurring clients to grow revenue.

Which leads to the next question:

Are psilocybin services in regulated markets too expensive?

There is a lot of discussion about how expensive legal psilocybin services are. Paying $2,000 or $3,000 out of pocket is a significant expense, but price and value are not the same thing.

A client is not simply buying mushrooms. They are paying for preparation, facilitator time, a regulated facility, an administration session that can occupy a room for much of the day, and follow-up integration.

Then consider the potential benefit. Early clinical studies have shown remarkable results, including substantial reductions in depression following only one or two psilocybin-assisted sessions. Compare that with traditional therapy, where someone might pay a few hundred dollars per session over months or even years. More than a few of our psychedelic clients have told us that their clients describe these experiences as “the greatest of their lives.”

I am not suggesting that psilocybin replaces therapy or that everyone will have the same result. But when you consider the amount of time involved and the potential value of the experience, $2,000 or $3,000 does not seem nearly as unreasonable.

At Calyx, we deal with the same concept. Our clients are not paying us simply to prepare a tax return. They are paying for the strategy, experience, accuracy, and support surrounding it. We believe people will pay when they understand the value.

I think the psychedelic industry still has work to do communicating just how much value these businesses provide.

Of course, everyone knows that recognizing the value and being able to afford the services are two different things.

Unfortunately, someone can fully understand the value of psilocybin services and still simply not have the money to spend.

That creates another challenge for an industry largely made up of people who genuinely want to make these medicines available to everyone, including people with limited financial resources.

Many psilocybin centers respond by offering sliding scales, scholarships, reduced pricing, and other measures to improve access. That is admirable and something I think the industry should continue to support.

But there has to be a balance.

A center still has rent, facilitators, employees, insurance, licensing, compliance, and all of the other costs of operating a highly regulated business. Combine that with the natural limits on how many clients a center can serve, and there simply is not unlimited room to reduce prices.

You cannot solve accessibility by making the businesses providing the services insolvent.

Finally, §280E takes an already difficult business model and makes it worse.

A center can collect $500,000 from clients, spend $450,000 operating the business, and earn $50,000.

But after §280E, these businesses can end up paying tax on income they never actually earned, while already dealing with limited capacity, limited recurring revenue, and pressure to keep services affordable.

Fortunately, psilocybin centers have an important argument at their disposal.

This is where the nature of the business becomes important. One of the foundational §280E cases is Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, better known as CHAMP. CHAMP distributed medical cannabis, but it also operated a substantial caregiving business. The IRS argued that §280E should disallow the expenses of the entire operation because cannabis was being sold. The Tax Court disagreed and concluded that CHAMP was operating two separate trades or businesses: the sale of cannabis and the provision of caregiving services. Ordinary business deductions related to cannabis remained subject to §280E, while expenses related to the caregiving business were deductible.

What makes CHAMP particularly interesting for psilocybin service centers is how the court divided the expenses. It did not require some impossibly precise calculation. Employee costs were allocated based on what the employees actually did, facility costs were allocated based on how the space was used, and expenses related entirely to the caregiving activity were deducted in full. In CHAMP, approximately 90% of the main facility was being used for caregiving rather than cannabis distribution, so the court allowed 90% of certain shared expenses.

That should sound very familiar to anyone operating a psilocybin center. The mushroom itself may represent only a small part of what the client is paying for. The client is paying for preparation, facilitator time, the use of the facility, the administration experience, and integration and support afterward.

So what does that mean for a small service center that cannot afford a specialized CPA firm?

The woman I spoke with was preparing her own partnership return and originally contacted us asking whether she needed to hire Calyx to implement a more sophisticated §280E strategy. In a perfect world, I would rather see someone familiar with §280E prepare the return. The accounting, methodology, and documentation matter. But a small service center struggling to stay open cannot spend money it does not have.

So I told her to start with the facts of the business. Separate the sale of the psilocybin product from the services surrounding it. Identify the product revenue and direct product costs separately, then look at how the remaining expenses relate to the service side of the business.

Ideally, rent would be allocated based on how the space is used, payroll based on what employees are actually doing, and other costs based on the activity they support. That is also closer to the methodology used in CHAMP.

The problem is that most small operators do not have perfect records showing exactly how every employee spent their time or how every square foot of the facility was used. If that information is not available, a simpler approach for shared overhead is to divide gross psilocybin product sales by total company sales and use that percentage to allocate a portion of those expenses to the psilocybin activity.

It is not as precise as a detailed allocation based on actual use, but it gives the business a consistent and explainable methodology rather than simply ignoring §280E or guessing at a number.

Most importantly, write down what you did. Explain the methodology, why you chose it, and how you calculated the allocation.

The goal is not to take every deduction possible. The goal is to take a reasonable position that you can explain and defend.

A sophisticated §280E return prepared by Calyx will look different.

There will be accounting-method analysis, workpapers, allocations, disclosures, and plenty of intimidating technical tax language we accountants are fond of. That provides additional protection.

But I do not believe the alternative for a struggling operator should be to automatically surrender nearly every business deduction simply because they cannot afford us.

There is risk in taking a CHAMP-based position.

The IRS can challenge whether two separate trades or businesses actually exist. It can challenge an allocation. It can disagree with the taxpayer’s interpretation of §280E. A taxpayer preparing their own return does not have the same level of support that they would have with experienced tax counsel or a specialized CPA firm.

None of that changes the underlying principle.

A taxpayer can make a good-faith effort to determine the correct tax treatment, maintain records supporting that treatment and take a position grounded in existing law.

That is very different from simply ignoring §280E.

I would also never build a tax strategy around the assumption that the IRS will not audit you. Enforcement priorities and resources change. A defensible position should still make sense if somebody eventually asks you to explain it.

The goal is not audit roulette. The goal is to survive long enough to build a sustainable business.

This article is intended for informational purposes only and does not constitute legal, tax, or medical advice.