If you work in the cannabis industry, you’ve undoubtedly heard about the IRS 280e tax law. This tax legislation punishes you for selling a banned narcotic by restricting most company expenditure deductions, potentially raising your income tax by 20x! Your strategic company forecasting must incorporate accurate section 280e calculations — this is critical for cash flow planning and avoiding catastrophic tax liabilities at year-end.
What exactly is IRS section 280e?
According to the IRS 280e tax rule, no deductions for typical business expenditures shall be permitted for a company that engages in the trafficking of a schedule i or schedule ii restricted narcotic. Simply put, the cannabis industry’s taxable income is closer to its revenue than to its profit. According to the 16th amendment, this is legally unlawful, thus the IRS has skirted the constitutional issues by allowing deductions for cost of goods sold.
The distinction between cost of products sold and regular business costs is clearly established in generally accepted accounting principles (gaap), yet it is sometimes overlooked by small company accounting services. Worse, an IRS income tax return does not adhere to the same standards as gaap. Add in section 280e restrictions, and the cannabis sector is in tremendous trouble.
This increasing tax burden applies to both medicinal and recreational marijuana.
What marijuana-related costs are deductible under section 280e?
According to IRS memorandum no. 201504011, the following business expenditures are tax deductible:
• Retailers of marijuana:
1. Purchase price of marijuana, minus any trade or other discounts
2. Transportation expenses
• For marijuana cultivators, extractors, and manufacturers:
1. Direct material expenses, for example, seeds or plants
2. Direct labor expenditures for planting, growing, harvesting, and so forth.
3. Category 1 indirect expenditures include: Repair charges, maintenance, and utilities such as heat, electricity, and lighting.
Rent indirect labor and supervisory salaries in production (including overtime, vacation and holiday pay, sick leave pay, and payroll taxes.)
Indirect materials and supplies
Capitalized tools and equipment
Quality control and inspection expenses, such as third-party testing or in-house QC labor.
To comply with the 280e tax legislation, proper cannabis accounting must include these charges on regular financial accounts.
How can i maximize my section 280e tax deductions?
Ordinary company expenditures must be deemed “inventorial costs,” often known as costs of products sold, in order to be deducted. As a result, you should collaborate with your accounting firm to verify that all allowable deductible costs are accurately documented. Here are some frequent areas of potential that we see customers overlook:
• Building rent should be prorated for grow/production areas.
• Define job titles and descriptions clearly for anybody working in production.
• Delegate management authority to only monitor production zones.
• Employ contractors who only work on and bill in production zones
A marijuana producing business, in general, will have considerably more complicated tax deduction compliance than a retail operation.
Cannabis firms’ financial planning
Tax preparation is just one aspect of corporate financial planning. Best-in-class cannabis firms do not stop at taxes; they obtain intelligent strategies by completing company growth research on a regular basis, developing systems to detect red flags of fraud, and considering macroeconomic tactics such as inflation plans.
If your cannabis company is ready to take planning to the next level, arrange a meeting with a fractional cfo to see how financial experts can help you develop earnings as well as weed.