As the cannabis industry continues to grow and evolve, it’s important for businesses in this sector to understand the unique tax implications they face. One of the most significant tax regulations affecting cannabis businesses is Internal Revenue Code (IRC) 280E. This regulation prohibits businesses from deducting expenses related to the sale of controlled substances, including marijuana, from their federal income taxes. This means that businesses in the cannabis industry are subject to a much higher tax burden than other types of businesses, and must take special care to ensure compliance with IRC 280E.
Understanding IRC 280E
IRC 280E was originally enacted in 1982 as part of the war on drugs and was intended to prevent drug traffickers from deducting business expenses related to the sale of illegal drugs. While the law was not specifically written to apply to the cannabis industry, the IRS has interpreted it to include cannabis businesses because marijuana is still considered a Schedule I controlled substance under federal law.
Under IRC 280E, cannabis businesses are only allowed to deduct expenses related to the cost of goods sold (COGS). This means that expenses related to production, manufacturing, and the direct sale of cannabis products may be deducted, but expenses related to general business operations, such as advertising and marketing, bank fees, office and administrative costs, and employee salaries pertaining to administrative or sales, may not be deducted.
Impact on Cannabis Businesses
The impact of IRC 280E on cannabis businesses can be significant. Since they cannot deduct many of their expenses from their federal income taxes, their effective tax rate can be much higher than other types of businesses. This can make it more difficult for cannabis businesses to be profitable and compete with other industries.
To mitigate the impact of IRC 280E, it’s important for cannabis businesses to carefully track their expenses and ensure that they are properly allocating expenses between COGS and non-COGS categories. This can be a complex and time-consuming process, but it’s essential for ensuring compliance with IRC 280E and minimizing tax liabilities.
In addition, cannabis businesses should consider working with a knowledgeable cannabis CPA firm who are experienced in dealing with the unique challenges of the cannabis industry. The Canna CPAs is a firm that specializes in providing cannabis accounting and tax services to cannabis businesses and can provide valuable guidance and support to help cannabis businesses navigate the complexities of IRC 280E and other tax regulations.
IRC 280E is one of the most significant tax regulations affecting the cannabis industry and can have a significant impact on the profitability of cannabis businesses. By understanding the regulations and working with experienced marijuana CPAs like The Canna CPAs, cannabis businesses can minimize their tax liabilities and ensure compliance with federal tax laws. With the right strategies and support, cannabis businesses can continue to thrive and grow in this rapidly evolving industry.
For more information on how we can help your cannabis business succeed with navigating IRC § 280E, call us today at 833-CPA-CANA or 833-272-2262.
Sandy Suchoff, CPA is the Founder and principal of Lefstein-Suchoff, CPA & Associates, LLC D/B/A The Canna CPAs. Suchoff has been featured and interviewed on MSNBC, FOX News, and Tune In Business Talk Radio as a tax advisor, as well as ONR Oklahoma PBS TV, Chasing News on FOX & WOR, KRQE 13, Cannabis Radio, Purple Haze Radio, and Cannabis Tech & Today as an advisor on cannabis tax and accounting.