Code Section 280E of the Internal Revenue Code is titled “Expenditures in connection with the illegal sale of drugs.” It is one long sentence that applies to any drug that is on the FDA Schedule I or Schedule II list.
The effect on the cannabis industry is to limit expenditures made by the cannabis operator for federal income tax purposes. So, if a cannabis operator spends money on certain types of expenses, they may not be deductible, and, in turn, cause the cannabis operator to pay higher federal income taxes.
Examples of expenses not deductible for a cannabis operator may include:
- marketing expenses
- administrative wages
- legal expenses.
Is there any hope for relief from high income taxes? Fortunately, there is a twist to Section 280E: marijuana business owners can deduct their cost of goods sold, the cost of their inventory. Let’s take a look at that “twist.”
A cannabis operator can reduce their income tax expense for the business by…
- allocating expenses which may directly affect the cost of their products
- allocating expenses among the different parts of their cannabis operations, some of which adapt better to the need for the expense to run the business
- defining and identifying costs more discretely to better describe the relationship of the cost to the products being sold.
These are just a few examples. We work with dozens of cannabis operators throughout the country to better understand 280E and help minimize their tax burden.
If you need CPA assistance, let’s talk. I can be reached at Bruce@CannabisCPA.Tax or 818-225-8022.
Link to the IRS’ Cannabis Industry resource page including information on Code Section 280E.