The Importance of Understanding the 280E Tax Code for the Marijuana Industry
The Importance of Understanding the 280E Tax Code
Whether you’re new to the cannabis industry or have an established business, you need to be aware of the 280E tax code designated by the IRS. Learn more here.
“Are you telling me you get paid to smoke weed?!”
On the one hand, running your own cannabis-based business sounds like the best job in the world.
It’s a fantastic conversation starter, that’s for sure.
But what most people don’t understand is how challenging it is to run a business when many people see your product as a public nuisance.
Besides the local youth pastor and your judgemental neighbor Deborah, Uncle Sam is one of those people.
In 1982, the US government passed the IRS tax code 280E. Cannabis business owners are still feeling the effects of this code put into place during Reagan’s war on drugs.
So what exactly does this code mean for you and your business? What can you do to protect yourself in the event of an audit?
Read on to learn more.
What is the IRS 280E Tax Code?
The IRS Code 280E regulates businesses that “traffic” controlled substances, like marijuana.
Congress passed this code in response to a convicted coke dealer. In court, this busted dealer attempted to claim regular business deductions for all his drug trafficking ventures.
The Reagan administration hoped to use this code to stop other kingpins from doing the same.
Cannabis is still considered a Schedule I drug by the federal government. Most businesses save thousands in taxes by subtracting employee wages and other costs from their total taxable income. But according to this tax code, businesses in the weed industry can’t claim tax deductions.
Well, with one exception.
Licensed cannabis businesses can write off expenses related to the cost of goods sold. In the tax world, “Cost of Goods Sold” means any expense directly related to buying and storing the products you sell. This means the cost of buying/growing weed, most inventory costs, shipping costs, etc.
This COGS exception creates a wonderful loophole for marijuana business owners. But we’ll get into that later. First, be aware of the all the risks this tax code creates for you:
This code makes tax prep work for the marijuana industry extra challenging. Combined with the negative stigma around marijuana, this creates a ripple effect of issues.
1. Audits and Fines
The IRS targets the marijuana industry will for audits and tax disputes more than anyone else. And it’ll be this way for the next decade at least.
Cannabis is still considered a Schedule I controlled substance by the federal government. Auditors assume any mistakes in your paperwork are a threat to public health and safety.
Should the IRS find any missing paperwork, fudged numbers, or deductions they don’t like, they’ll charge you back taxes. They’ll add interest to these back taxes if you need more than a month to pay them off. They’ll also charge a hefty fine on top of it all to discourage repeated mistakes in the future.
It’s more cost effective to play by the rules and pay a little more in taxes up front. Whatever money you save by cutting corners could cost you thousands (plus interest) down the line.
2. Industry Bias
Some financial specialists will use your industry as an excuse to charge you 3-5 times the normal amount for their services. Other institutions may refuse to work with you altogether.
Stand your ground! You don’t have to tolerate this bias.
If you feel you’re being price gouged by a financial specialist, get a quote from somewhere else. See what your options are.
There are good people who believe in the future of the marijuana industry and want to see your business succeed. Don’t become a victim of industry bias.
3. State Laws
Each state has different laws about how you can run your marijuana business.
This goes for both filing taxes and every other aspect of day to day operations. Since cannabis is still a new legal industry, these state policies change often.
There are going to be plenty of deductions to claim on the state level that the federal 208E tax code won’t allow. But these will vary from state to state, especially if the state only allows medicinal licenses.
Stay well educated each quarter to make sure all laws are being followed on both the state and federal level.
Lucky for you, there are effective ways to work around each of these pitfalls.
Eureka! The Dual Business Loophole
The easiest way to maximize your federal tax deductions is to split your business in two.
The case CHAMP vs Commissioner set the precedent for this.
In short, you can separate the part of your business that buys and handles marijuana into its own LLC. Everything else you do, like selling merch or advertising, should become another LLC.
Turning one business into two businesses sharing the same building allows you to write off way more deductions. You can write off everything the weed handling side does as COGS. The other business, that handles everything else, is no longer “trafficking” weed and can write off everything as normal.
Don’t assume this means you can relax though. You’ll still need to keep air-tight paperwork to avoid nosey auditors.
You Can Have Your Deductions and Sell Weed Too
Well, most of them anyway.
The federal government is still biased against your industry. But private accounting consultants like us aren’t. Tax Code 280E may be strict, but creating dual businesses in the same building is an effective way to work around it.
As long as you’re on top of your paperwork and following all state tax codes, you’ll be fine.
Thanks for reading!