This list offers some common business expenses that you many not write off on your cannabis business tax return.
- IRC 280E prohibits any company operating in connection with a Schedule 1 or Schedule 2 drug from deducting certain business expenses.
- The cost of goods sold (COGS) provision allows for some business expenses to be claimed, even where the goods are illegal under federal law.
- Read on for a list of 60+ deductions your cannabis company is not permitted to take.
The 280E federal regulation dictates what cannabis operators can deduct on their tax return.
The main thing you need to know is that the IRC 280E prohibits any company operating in connection with a Schedule 1 or Schedule 2 drug from deducting certain business expenses.
Unfortunately, cannabis is still a federal Schedule 1 substance under the Controlled Substance Act, and as a result, your business cannot claim normal business deductions.
However, there’s part of the 280E that opens a small window for some business deductions to be claimed by cannabis operators. The “cost of goods sold,” provision allows for some business expenses to be claimed, even where the goods are illegal under federal law.
But there is a lot of confusion around the COGS provision.
In general terms, COGS means “the direct costs attributable to the production of the goods sold in a company.”
You can find specific guidance on what COGS deductions you can take as a reseller or producer in this article, but beware: stretching the definition of “direct cost” can get you into audit territory. The IRS does not shy away from penalizing cannabis operators, as the Harborside case has proven.
Here’s a big list of things you may not deduct under the 280E. These expenses do not count under the cost of goods sold provision.
- Advertising and marketing
- Amortization
- Bad debts that you cannot collect
- Banking fees
- Board meeting expenses
- Business association membership dues
- Business-related travel expenses
- Vehicle expenses
- Charitable deductions made for a business purpose
- Cleaning/janitorial services
- Commissions to outside parties
- Computer and tech equipment
- Consulting fees
- Conventions and trade shows
- Credit card convenience fees
- Employee salaries and wages for sales staff
- Equipment and equipment repairs
- Exhibits for publicity
- Franchise fees
- Freight or shipping costs
- Furniture or fixtures
- Group insurance (if qualifying)
- Health insurance and/or other insurance
- Home office expenses
- Insurance premiums for credit, liability, malpractice, worker’s comp, and other insurance
- Interest
- Internet hosting and services
- Inventory
- Investment advice and fees
- Legal fees
- License or permit fees
- Management fees
- Materials
- Maintenance
- Medical expenses (with plan)
- Mortgage interest on business property
- Moving and storage costs
- Office supplies and expenses
- Payroll processing
- Payroll taxes for employees, including Social Security, Medicare taxes and unemployment taxes
- Parking and tolls
- Penalties and fines
- Pension plans
- Postage
- Rebates on sales
- Rent
- Research and development
- Retirement plans
- Royalties
- Software and online services
- Subcontractors
- Theft and loss
- Utilities
- Waste removal
- Website design
- Workers’ compensation insurance
If you would like one of our experts to review your tax return to make sure you’re taking the proper deductions, get in touch by clicking on the link below.