If you are a cannabis business in the United States, then there is nothing that costs you more than this little rule. More than anything, it distinguishes the bookkeeping of a legal cannabis business from a regular legitimate business. It is what mostly makes it much more expensive to operate a legal cannabis business than a company selling a fully legal product. Section 280E of the Internal Revenue Code officially states: No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. If you’re having trouble understanding exactly what that tax law means don’t stress, we are here to help provide a little guidance. While this exemption is not good news for cannabis businesses, there are ways to minimize the amount of federal taxes you have to pay as a legal cannabis related business. However, this will largely depend on the individual business activities and business expenses of your firm. Let us break down exactly what the 280-E exemption means. Let us also give a little bit of background to help understand how to effectively and, most importantly, legally bypass it to the greatest extent possible. We will not give you any advice here that is not solidly backed up by US case law. However, for the particulars regarding your business, we still think its always best to consult a CPA or lawyer. Typical businesses are allowed to deduct from their federal and state income taxes the costs of doing business, or essentially inventory costs. For regular companies, the activities included that can be deducted for tax purposes include many indirect costs and are very expansive. This is not the case for the cannabis industry. Since many of these indirect exemptions were enacted after the 280-E exemption, the Internal Revenue Service (IRS) ruled that cannabis businesses using the 280-E exemption may not make the same ones. This is taken for granted by legal firms, however, the Internal Revenue Code 280-E exemption says explicitly that any income earned by a business from the sale of substances that are illegal under federal law cannot be deducted from federal taxes. Congress passed this tax code, knowing there could be a constitutional challenge to it on a very legitimate basis in tax court. So, as a way of narrowing the scope of the law to not specifically be prejudicial against anything except for the commerce of a substance that is still technically illegal under federal law despite being legal under state law in some states like California and Colorado. In other words, ancillary activities to the sale of the product are legal and deductible, but the actual purchase of the illegal substance or those products containing it is not. So, to illustrate what is permissible and what is not, we first need to explain to you that it is likely you will have to form two separate entities if you want to gain the tailwind of partial deductions for whatever portion of your revenue is derived from activities that are not the sale of cannabis. For example, if you are selling legal glass products that are primarily used for tobacco, you would be able to deduct that. If you have a part of your dispensary that sells CBD, then you should be able to deduct it, right? Not necessarily, this is a particularly complicated question because if your CBD is derived from Hemp (cannabis plants that contain less than 0.3% THC by dry weight), then you would be able to deduct that section of your business (if it's included in a separate entity). The key recommendation here, if you do not glean anything else at all from the piece of writing, should be not to try to dupe or in any way be dishonest to the IRS. If you are going to deduct anything as a marijuana business, you will have one section of your business subject to the 280-E exemption and one that is not. These can maintain an official affiliation, and you can even pay salaries to employees from both entities to maximize tax savings. In other words, to get clever, you would inventory employees' tasks minute by minute and pay them from the exempt entity for tasks not directly involving the sale of cannabis and pay them from the other entity when they are. This can help avoid the consequences the 280-E exemption has tended to have the most, which has been to negatively affect workers' wages at the bottom of the pecking order rather than discouraging the sale of cannabis. Hopefully, the projected budgetary shortfalls in state, local and federal coffers will lead to equal treatment of non-cannabis and cannabis businesses, particularly when the latter are flourishing and producing high-wage jobs in many cases. Until that day comes, the key to enjoying any financial benefit is honesty and maniacal record-keeping. You need to be able to show the IRS without a doubt that the entity you are operating that is deducting any activities gains absolutely no financial benefit directly from the sale of illegal substances if it is not subject to 280-E.
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