Cannabis has been criminalized, decriminalized, and recriminalized. With respectable enterprises sprouting everywhere, it will remain decriminalized.
It's permitted for medicinal and recreational use statewide but still unlawful.
Cannabis entrepreneurs must struggle to maintain their illicit enterprises. It's perplexing; especially during tax season with the 280e tax rule that hurts revenue. There's an aid, thankfully. Read on to understand how to handle the 280e tax rules.
280e Tax Code Challenges
The 280e tax code annoys cannabis entrepreneurs everywhere. Ronald Reagan started the war on drugs. In 1981, IRS tax code 280e was created. This year, a convicted cocaine, amphetamine, and cannabis trafficker fought for his federal tax rights in court.
He wanted to deduct "ordinary" business costs from his "taxable" income. The 280e tax code still penalizes cannabis businesses.
What's Section 280e?
IRS-mandated 26 U.S. Code Section 280e prohibits "illegal" enterprise. Section 280e prohibits "trafficking" schedule I and II-restricted drug firms from deducting costs from gross revenue, including credits.
Marijuana is Schedule I. It's nationally illegal. Despite state legalization, federal law considers all cannabis firms narcotics traffickers. Cannabis entrepreneurs must pay taxes on all company income. They cannot deduct business costs to reduce taxable income.
Selling Price
COGS are the exception—but only slightly. Congress feared constitutional challenges to Section 280e when it approved it. This statute has a limited exception for future challenges. Even illicit things can be deducted under this exception.
Inventory expenses dominate the cost of goods sold. This includes the goods, shipment to the retail location, and any connected costs.
Given the IRS's definition of "cost of products sold" for the cannabis sector, it's not much of an exception. The IRS ignores tax changes following section 280e that would enable additional indirect expenses to be applied to the cost of goods sold. Thus, distribution costs are excluded from the cost of items sold.
That includes outgoing and some inbound shipping, rent, overhead, contractor payments, maintenance and repairs, health insurance premiums, marketing and advertising, utilities, and personnel costs. The cost of items sold mostly pertains to seeds, soil, water, and nutrients for planting and cultivation.
Cannabis Industry Effects
Section 280e makes cannabis companies expensive. Gross profit is taxed for cannabis enterprises. Cannabis entrepreneurs frequently pay 70% or higher tax rates. That's treble or more than non-cannabis business owners' tax rates.
Rent, utilities, staff pays perks, etc. Business costs cannot include those items. This can make a business unprofitable, considering all of this.
Optimizing Deductions
Cannabis suffers under the 280e tax legislation. Taxes can be reduced. Accounting and compliance are the foundation. Considerations:
Improve Corporate Structure
Startups can choose from three company structures. C-corporations, S-corporations, and LLCs, are those formations (LLC).
Most attorneys recommend C-corporations for cannabis enterprises. Owners of C-corporations only pay taxes on their salaries and dividends.
Consider An SSA
Shared services agreements break your firm into two. Create two corporate organizations to traffic Schedule I and II-restricted narcotics under the 280e tax rule.
The first facility would produce and distribute cannabis. The second structure handles legal matters. Legal obligations include care, counseling, selling non-cannabis-infused items, and managing the shop area.
With a shared service agreement, only the first structure must comply with the 280e tax rules and the cost of goods sold. The second structure allows wages, rent and utilities, sales, administration, promotion and marketing, and distribution deductions.
Consult cannabis compliance experts. This prevents violations.
Employee Duties
Accurate salary reports are part of cannabis industry compliance. When you hire people, assign them roles and compensate them properly.
Part-time bud tenders and cultivators pay varying taxes. Tracking employees' time for numerous jobs is necessary. This helps you calculate 280e tax code deductible hours.
Audits
You operate a drug-related company. You're audited more.
From cultivation through sales and beyond, track every dime. Even little receipts should be organized. Details are preferable, especially for selling expenses. Deductions without proof are fined.
You'll Need Help
The 280e tax code is complicated. Experts can help you with all your HR needs. We can help you stay compliant and in business with payroll, taxes, and more. Contact us today to see how we can assist.