Cannabis Knowledge & Insights

IRC 280E – Impact on Cannabis Business Taxes [Cannabis Accounting]

Continue reading and watch our video below to learn more about IRC 280E and its Impact on Cannabis Business Taxes and Cannabis Accounting.

Hey my name is Jim Breese from GreenGrowth CPAs and today I want to talk to you about 280e so it seems like every other day in the United States another state is moving closer and closer to passing a piece of legislation that actually further supports the legalization of cannabis however despite the rising acceptance of legal cannabis that remains several federal and state laws and tax codes that need to catch up to current times and this includes IRC 280e but before we get started I need to let you know the information contained in this video is meant for guidance purposes only and not as professional legal or tax advice further it does not give personalized legal tax investment or business advice in general so with that out of the way let’s hop right in alright so if you’ve never heard of it what is 280e well the IRC 280e is a piece of tax code that forbids any business connected with a schedule 1 or schedule 2 drug from deducting any business expenses and since cannabis is still as you know it’s still considered a Schedule one substance at the federal level due to the Controlled Substances Act state license and legal cannabis businesses cannot claim normal business deductions like payroll marketing expenses and rent so because cannabis businesses cannot deduct these items they are at a serious financial disadvantage compared to ordinary non cannabis businesses so for example check out this comparison on the screen of two businesses one ordinary business on the left and one cannabis based business on the right now they both make a million dollars in sales and they both have $400,000 in cost of goods sold or cogs they both have $500,000 in sales and marketing expenses okay but there is a difference that the ordinary business can deduct those expenses while the cannabis based business cannot but the business only pays the ordinary business only $35,000 in taxes while the cannabis business pays two hundred and ten thousand dollars in taxes now this is simply at the federal level and it flows down into the state level as well so the discrepancy between the two types of businesses is huge okay and without the proper tax planning and tax structuring you may find yourself on the wrong side of the fence come tax time so it’s very very very important that you understand 280e and how to work within the bounds of it all right now the experts at green growth CPAs here have helped cannabis businesses save at least minimum two million dollars on their taxes over the past few years so here’s what we want you to know about 280e so how does 280e hurt legal cannabis businesses well in order to calculate your federal income tax usually you would start with your gross income and then subtract all the business expenses to get to taxable income and non cannabis businesses would then pay their taxes on that final taxable amount now there’s a large number of business deductions that actually benefits small business owners and non cannabase businesses because their final taxable income is much much lower because of those business expenses and unfortunately cannabis based businesses are not so lucky the cannabis businesses pay taxes on gross income and they do not get to subtract any normal business deductions or expenses so the taxable amount of a cannabis business is often double or even triple that of a regular based business this means that cannabis businesses do not have all those extra funds to potentially reinvest into their company or give to their employees as raises however some supporters of 280e often cite that hey this actual increased taxable benefits and all the taxes that go to the city are gonna you know benefit the local school and thus you know the police departments in other public entities while it is a great high the cysts there has been no evidence to show that the actual dollars from cannabis companies are being spent specifically on those expenses as always there may be a few exceptions to the no deductions rule for example cannabis businesses are allowed to deduct cost of goods sold or cogs now cost of goods sold refers to all the costs involved in selling a product for example the packaging the labeling and any costs related to the sale of the cannabis we have done a deep dive into cogs and what can be deducted under cogs and some of our previous posts and some of those links are in the description below this video or in the blog post below this video now it is best to contact a CPA who specializes in taxes within the cannabis industry because you need to know and understand all the things that can be taken as a cogs deduction this domain expertise of being in the cannabis space and having a lot of experience is worth its weight in gold so for example you can deduct the products and the packaging and anything else directly directly related to the actual sale of the cannabis product you can also deduct the invoice price for the cannabis less any trade or other discounts you can also deduct the electrical bills for the designated inventory areas but not electricity in the sales areas okay and lastly you can deduct transportation costs you know that are you know with the travel to purchase the cannabis or transportation or shipping costs of the actual cannabis all right so what can you not deduct as a cannabis based business well you can’t it up payroll you can’t deduct office supplies or anything not directly related to the product to the cost of the product alright so if you attempt to actually deduct a business expense that is illegal by federal law you’re exposing your cannabis business to be subject to an IRS audit and let me give you a not so fun fact about this okay from anecdotal evidence coming out of Colorado over the past few years one in five cannabis based businesses are experiencing audits by the IRS and let me give you some context this is ten times the average of ordinary based businesses so all-in-all I highly suggest you work with an experienced cannabis industry CPA who can actually protect you against an IRS audit and if it comes down to the fact that you get audited they are there to make a great case for your business and protect your bottom line and protect your business okay so why does 280e even exist well okay in the early 1980s during the height of the war on drugs a drug dealer won a case where he was legally allowed to deduct business expenses like car repairs and business supplies on his taxes well the government didn’t like that precedent that was set and put into motion a tax code that prevented other drug dealers from actually doing the same thing thus 280e was created and well look since the 1980s the United States has come a long long way in terms of cannabis legalization today over 30 states have legalized medical marijuana or recreational marijuana has become legalized in at least ten states so clearly 280e needs to change in order to keep up with the demand for the legal cannabis market a revamped 280e tax code could benefit legal cannabis business owners and allow them the additional funds to actually reinvest and grow their business and support their employees so look if you need help with calculating your cogs and staying compliant with 280e and making sure you do not overpay your taxes by even one cent then please get in touch with the experts here at Green grill CPAs and reach out to us via our website at green growth CPAs com or give us a call at one eight hundred six seven four nine zero five zero I hope this video was helpful have a great day and we’ll talk to you soon