Section 280E is a tax code that makes cannabis businesses declare their earnings to the IRS. It has made it problematic for cannabis businesses to thrive. However, it is not entirely impossible to make it work. This article explains what section 280E means, what to expect, and most importantly, how to go about with the IRS.
The 280E is a tax code created in the 1980s after the "war on drugs" and the many cases brought to court. Ultimately, the 280E code makes sure that traffickers are not deducting ordinary corporation costs under federal tax law. Before the legalization of cannabis came to actuality, smugglers were earning millions through the black market.
Even though the 280E makes it harder for legitimate marijuana businesses to flourish,
it prevents legal cannabis owners from deducting expenses for producing, purchasing, or distributing their products.
This then leads to much higher tax rates for these businesses. Therefore, leaders in several cannabis industries have started to push the legislative resolutions to adjust and the code to allow deductions.
In addition, even if the legal adult use of medical cannabis operations only operates with controlled substances according to federal law, businesses cannot bypass the tax court. There are ways to avoid the 280E tax code violation by a few simple steps. First, make sure your company concedes to its state's regulations. Second, cannabis operations comply with the tax code by splitting their companies in half. Operate two entities under one roof, and deduction might be achievable. Third, avoid incorporating as an S-Corp or an LLC because of the unique restrictions this code pursues. Lastly, you cannot avoid paying taxes under this code, but a deduction shall be possible.
In short, Section 280e severely restricts what deductions cannabis companies may take as they must pay full income taxes. However, careful (and legal!) accounting can separate cannabis activities from unrestricted activities so that the taxpayer can claim some federal deductions. This is even before you consider state taxes and their unique deduction rules. Still looking for answers, we are here. We want to help you and your business thrive; contact us for any concerns or thoughts. We are here for you.