IRC 280E
IRC 280E is a section of the Internal Revenue Code that specifically applies to businesses that engage in the sale or distribution of controlled substances. This section prohibits businesses from deducting ordinary business expenses from gross income if they are trafficking controlled substances found on Schedule 1 or Schedule 2 of The Controlled Substance Act. This includes marijuana which is listed as a Schedule 1 drug and considered a controlled substance under federal law. As a result, these businesses can end up paying significantly higher taxes than other businesses.
While IRC 280E was originally intended to target illegal drug trafficking operations, it has had a significant impact on legal marijuana businesses in states where cannabis has been legalized for medical or recreational use. Despite the fact that marijuana is legal in these states, it remains illegal under federal law, which means that these businesses are still subject to the restrictions of IRC 280E.
Trafficking
Under the Controlled Substances Act (“CSA”), “trafficking” a controlled substance refers to the manufacture, distribution, dispensation, or possession with the intent to distribute a controlled substance. This includes any activity involved in the transfer of a controlled substance from one person to another, whether or not money or any other form of compensation is involved.
Trafficking can include a range of activities, from small-scale distribution to large-scale drug trafficking operations. The CSA classifies controlled substances into five schedules based on their potential for abuse and accepted medical use, and penalties for trafficking can vary depending on the schedule of the drug involved and the amount being trafficked.
The penalties for trafficking a controlled substance can be severe, including lengthy prison sentences and large fines. In addition to federal law, states may also have their own laws regarding the trafficking of controlled substances, and penalties may vary by state.
It is important to note that trafficking a controlled substance is illegal under federal law, even if the substance is legal in a particular state for medical or recreational use. This can create challenges for businesses operating in the cannabis industry, which is legal in some states but remains illegal under federal law.
Cost of Goods Sold Significance with Cannabis Tax Deductions
In a number of cases, the Tax Court has held that Cost of Goods Sold (“COGS”) for a marijuana business should be treated as an adjustment to gross income, rather than a deduction. The rationale for this is that COGS is not an ordinary business expense in the same way that rent, wages, or marketing costs are. Instead, COGS is considered to be a direct cost of producing or acquiring the product being sold.
In cases such as Olive v. Commissioner and Patients Mutual Assistance Collective Corp. v. Commissioner, the Tax Court has held that the COGS for a marijuana business is properly calculated using the inventory accounting method required by Section 471 of the Internal Revenue Code. Under this method, the cost of goods sold is the sum of the cost of the inventory items sold during the tax year.
If you look at a federal corporate tax return—form 1120—you can see that the formula to arrive at total income is Gross receipts or sales — Cost of goods sold.
By treating the COGS as an adjustment to gross income rather than a deduction, the Tax Court has effectively allowed marijuana businesses to reduce their taxable income by the amount of their COGS, even though they are not allowed to deduct other ordinary business expenses. This has been an important consideration for marijuana businesses that are subject to IRC 280E, as it has allowed them to reduce their tax liability to some extent. However, the precise calculation of COGS remains a complex and highly contested issue in the context of IRC 280E, and businesses operating in the cannabis industry should work with experienced cannabis CPAs and cannabis tax professionals like The Canna CPAs who possess the necessary expertise to ensure that they are complying with all applicable tax laws and regulations.
Challenges faced by cannabis businesses
As a cannabis company, navigating the complex and ever-changing landscape of regulations and laws can be a daunting task. Unfortunately, many CPA firms and bookkeepers are not well-versed in the intricacies of IRS Section 280E, which can lead to costly mistakes and missed opportunities for tax savings. Additionally, preparing financial statements in compliance with Section 280E can be a challenge for bookkeepers and accountants who lack experience in this area.
Furthermore, understanding the unique state laws and regulations outside of your home state can be difficult for most accounting firms. Finding the right support partner who is knowledgeable in these areas can be a challenge, especially since some professionals may still hold negative perceptions about the cannabis industry.
Ultimately, getting consistent attention and direction to ensure your business is operating at its highest level can be hard to come by. However, with the right team of experienced and knowledgeable cannabis CPAs, cannabis bookkeepers, and cannabis CFOs on your side, like The Canna CPAs, you can overcome these challenges and thrive in this dynamic industry.
We know cannabis, We know cannabis case law, We know cannabis tax & tax codes—Who better to accounting & implement your accounting & tax strategies other than the CANNA CPAS?
Strategic Cannabis Accounting for Maximum Tax Savings:
Strategic Cannabis Accounting for Maximum Tax Savings:
Cannabis Bookkeeping
Fractional Part-time CFO Services
What is a fractional CFO & how can it help your cannabis company?
Profit first for cannabis business
The Profit First method is an innovative financial management system developed by entrepreneur Mike Michalowicz. This system is designed to help businesses of all sizes improve their cash flow, increase profitability, and build financial reserves.
At its core, the Profit First method involves dividing a business’s revenue into different accounts, each with a specific purpose. These accounts include profit, owner’s pay, taxes, and operating expenses. By allocating revenue in this way, businesses can gain greater visibility into their finances and ensure that they have the funds they need to cover expenses, pay taxes, and, most importantly, prioritize and generate profit.
For cannabis businesses, implementing the Profit First method can be particularly beneficial. Due to the unique financial challenges faced by this industry, such as high tax rates and limited access to banking services, managing cash flow and planning for future expenses can be particularly difficult. However, by using the Profit First method, cannabis businesses can gain a clearer understanding of their finances and achieve greater success in their operations.
At The Canna CPAs, we understand the importance of sound financial management practices for cannabis businesses. That’s why we’re proud to offer expert guidance on implementing the Profit First method for your business. Our team of experienced professionals can help you set up different accounts for various expenses, identify key financial metrics to track and develop a regular review process to ensure that the system is working effectively.
By implementing the Profit First method, you can improve your cash flow, increase profitability, and build a stronger financial foundation for your cannabis business. To learn more about how we can help you implement this system in your operations, contact us today.
While IRC 280E was originally intended to target illegal drug trafficking operations, it has had a significant impact on legal marijuana businesses in states where cannabis has been legalized for medical or recreational use. Despite the fact that marijuana is legal in these states, it remains illegal under federal law, which means that these businesses are still subject to the restrictions of IRC 280E.
Trafficking can include a range of activities, from small-scale distribution to large-scale drug trafficking operations. The CSA classifies controlled substances into five schedules based on their potential for abuse and accepted medical use, and penalties for trafficking can vary depending on the schedule of the drug involved and the amount being trafficked.
The penalties for trafficking a controlled substance can be severe, including lengthy prison sentences and large fines. In addition to federal law, states may also have their own laws regarding the trafficking of controlled substances, and penalties may vary by state.
It is important to note that trafficking a controlled substance is illegal under federal law, even if the substance is legal in a particular state for medical or recreational use. This can create challenges for businesses operating in the cannabis industry, which is legal in some states but remains illegal under federal law.
In cases such as Olive v. Commissioner and Patients Mutual Assistance Collective Corp. v. Commissioner, the Tax Court has held that the COGS for a marijuana business is properly calculated using the inventory accounting method required by Section 471 of the Internal Revenue Code. Under this method, the cost of goods sold is the sum of the cost of the inventory items sold during the tax year.
If you look at a federal corporate tax return—form 1120—you can see that the formula to arrive at total income is Gross receipts or sales — Cost of goods sold.
By treating the COGS as an adjustment to gross income rather than a deduction, the Tax Court has effectively allowed marijuana businesses to reduce their taxable income by the amount of their COGS, even though they are not allowed to deduct other ordinary business expenses. This has been an important consideration for marijuana businesses that are subject to IRC 280E, as it has allowed them to reduce their tax liability to some extent. However, the precise calculation of COGS remains a complex and highly contested issue in the context of IRC 280E, and businesses operating in the cannabis industry should work with experienced cannabis CPAs and cannabis tax professionals like The Canna CPAs who possess the necessary expertise to ensure that they are complying with all applicable tax laws and regulations.
Furthermore, understanding the unique state laws and regulations outside of your home state can be difficult for most accounting firms. Finding the right support partner who is knowledgeable in these areas can be a challenge, especially since some professionals may still hold negative perceptions about the cannabis industry.
Ultimately, getting consistent attention and direction to ensure your business is operating at its highest level can be hard to come by. However, with the right team of experienced and knowledgeable cannabis CPAs, cannabis bookkeepers, and cannabis CFOs on your side, like The Canna CPAs, you can overcome these challenges and thrive in this dynamic industry.
Our experienced cannabis accountants understand the ins and outs of Section 280E and will ensure that your financial statements and books accurately reflect your costs in compliance with this IRS provision. Beyond compliance, we also provide meaningful and actionable insights into your business based on your financial data, so you can make informed decisions and drive growth.
We understand the unique challenges faced by cannabis businesses, and we work closely with you to provide tailored solutions that help you navigate the complexities of the industry. With our guidance and expertise, you can make informed decisions, set strategic goals, and scale your business for long-term success. Let us be your trusted partner in financial management and help you achieve your business objectives.
At The Canna CPAs, we believe that understanding and utilizing your financial data is critical to making informed business decisions. That's why our Cannabis Fractional CFO Services also include Functional Financial Metrics.
We work with you to identify your Key Performance Indicators (KPIs), which are the metrics that matter most to your business. Then, we develop a customized dashboard that provides you with real-time access to the data that drives your business. Our team compiles your data in a simplified and personalized format, designed just for you from seed to sale.
With our Functional Financial Metrics, you can easily monitor your business performance, identify trends, and make data-driven decisions that optimize your profitability. With our objectives, action plans, and corrective processes, we can guide you to running a more profitable cannabis business. Let us help you take your business to the next level with our expert guidance and customized financial solutions.
What is a fractional CFO & how can it help your cannabis company?
- A Fractional CFO is a high-level strategic advisor who provides expert financial guidance to businesses. They offer support where it's needed most, whether it's cash flow management, forecasting, budget creation and reporting, or financial reporting for investors, and everything in between.
- Essentially, a Fractional CFO serves as your dedicated finance resource to support the growth and strategy of your enterprise. As the name suggests, they serve as your company's CFO, but at a fraction of the cost of a full-time hire. With a Fractional CFO, you get the expertise and support of a seasoned financial executive without the full-time expense.
- Amidst all the buzz surrounding medical and recreational cannabis, 280E, and legalization, it's easy to forget that, at the end of the day, your primary goal is to run a successful business. That's where a Fractional CFO can help you elevate your business to the next level and stand out from the competition.
- At The Canna CPAs, our Fractional CFO services are designed to provide the expert financial guidance and strategic support you need to achieve your business goals. Whether you need assistance with cash flow management, forecasting, budget creation, and reporting, or financial reporting for investors, our experienced team is here to help.
- With a Fractional CFO from The Canna CPAs, you get the benefit of a seasoned financial executive at a fraction of the cost of a full-time hire. We work closely with you to understand your unique needs and tailor our services to help you optimize your profitability, make informed decisions, and drive growth.
- In addition to financial modeling and forecasting, we provide interactive financial dashboards to help you manage and grow your business effectively. These dashboards provide real-time access to key performance indicators (KPIs), allowing you to make informed decisions and take action to optimize your profitability.
- At The Canna CPAs, we offer comprehensive financial modeling and forecasting services, including proformas, budgets, and cash flow forecasts. Our expert team works closely with you to build a growth plan that not only meets but exceeds these projections.
- With The Canna CPAs on your side, you can be confident in your financial planning and decision-making. Our customized financial solutions are tailored to meet the unique needs of cannabis businesses, so you can achieve your growth objectives and succeed in this dynamic industry.
- Managing cash flow can be a major challenge for businesses, particularly for cannabis businesses burdened by the tax implications of IRS Section 280E. At The Canna CPAs, we understand the unique cash flow challenges faced by cannabis businesses, and we offer expert guidance and support to help you optimize your cash flow.
- Our team will work with you to project cash flows based on current operations and projected changes, identify any needed cash infusions into the business, and create strategic plans to increase cash inflows and decrease or delay cash outflows. With our support, you can make informed decisions to optimize your cash flow and achieve your financial objectives.
- Don't let cash flow issues hold your business back. Let The Canna CPAs be your trusted partner in financial management and help you navigate the complexities of the cannabis industry with confidence.
- At The Canna CPAs, we understand that every cannabis business is unique and has its own set of key performance indicators (KPIs) to track. We start by identifying the KPIs that are relevant to all cannabis businesses and then work with you to understand the specific needs of your business.
- Our experienced team will gain an understanding of where your business is struggling and where it's excelling to help formulate the balance of KPIs that you need to track. We then tie these KPIs to your financial forecasts to help determine if you're on track to meet your overall financial goals.
- Don't let the complexities of the cannabis industry hold you back. Let The Canna CPAs be your trusted partner in financial management and help take your business to the next level.
- At a minimum, we meet with our clients on a monthly basis—however, we will meet with you as often as you require or desire.
- With our customized approach to KPI tracking, you can be confident that you're monitoring the metrics that matter most to your business. Our expert guidance and support can help you optimize your operations, increase profitability, and achieve your growth objectives. Let us be your trusted partner in financial management and help take your business to the next level.
Our experienced bookkeeping department understands the ins and outs of Section 280E and will ensure that your financial statements and books accurately reflect your costs in compliance with this IRS provision. Beyond compliance, we also provide meaningful and actionable insights into your business based on your financial data, so you can make informed decisions and drive growth.
Let us take care of your bookkeeping needs, so you can focus on what you do best – running and growing your business. With our expert guidance and support, you can rest easy knowing that your financials are in good hands.
For cannabis businesses, implementing the Profit First method can be particularly beneficial. Due to the unique financial challenges faced by this industry, such as high tax rates and limited access to banking services, managing cash flow and planning for future expenses can be particularly difficult. However, by using the Profit First method, cannabis businesses can gain a clearer understanding of their finances and achieve greater success in their operations.
At The Canna CPAs, we understand the importance of sound financial management practices for cannabis businesses. That’s why we’re proud to offer expert guidance on implementing the Profit First method for your business. Our team of experienced professionals can help you set up different accounts for various expenses, identify key financial metrics to track and develop a regular review process to ensure that the system is working effectively.
By implementing the Profit First method, you can improve your cash flow, increase profitability, and build a stronger financial foundation for your cannabis business. To learn more about how we can help you implement this system in your operations, contact us today.
We know cannabis, we know cannabis case law, we know cannabis tax & tax codes—who better to implement your accounting & tax strategies other than The Canna CPAs?
- Compliance with regulations: The cannabis industry is heavily regulated, and accounting and financial reporting requirements for cannabis companies can be complex and constantly changing. A cannabis CPA who is well-versed in GAAP accounting can ensure that your company's financial statements are accurate and compliant with applicable regulations.
- Accurate financial reporting: GAAP accounting provides a standardized set of principles and guidelines for financial reporting that ensures consistency and accuracy across different companies and industries. By having a cannabis CPA perform GAAP accounting, you can be confident that your company's financial statements are reliable and accurate, which is important for making informed business decisions and attracting investors.
- Tax preparation and planning: Cannabis companies face unique tax challenges, including limitations on deductions and credits due to federal regulations. A cannabis CPA can help ensure that your company is properly accounting for income and expenses, preparing accurate tax returns, and planning for future tax liabilities.
- Investor confidence: Having a cannabis CPA perform GAAP accounting can increase investor confidence in your company's financial statements and overall business operations. This can help attract investors and financing, which is essential for growing and scaling a successful cannabis business.
- Pursuant to the governing tax code, growers and manufacturers are afforded additional cost of goods sold deductions when they issue GAAP financials.
- When you adhere to GAAP--a nationally standardized method of accounting designed to promote consistency, clarification, comparability, and communication-- in addition to having a clean set of books and thoroughly documented workpapers, you are at an advantage in a tax audit. By having all of this on your side, you will be afforded credibility, which will lend itself to more persuasive arguments—especially those in a grey area of tax law,
- In summary, having a cannabis CPA perform GAAP accounting is important for ensuring compliance with regulations, tax savings, tax audits, accurate financial reporting, effective tax planning, and building investor confidence.
We specialize in maximizing allowable deductions under Section 280E while ensuring that these strategies are formulated strategically and compliant. With our expertise, you can rest assured that your tax filings are accurate and optimized to help your business thrive. Let us handle your tax needs so that you can focus on what you do best – growing your business.
