IRS 280E for Marijuana Businesses: The Conundrum
Section 280E greatly hinders the marijuana industry. Typically, businesses are allowed to deduct certain business expenditures. Examples of regular deductions include salaries, health insurance premiums, advertising costs, marketing costs, and many more. This allows the business to not pay taxes on the money it earns and spends on these expenditures.
Typically, this allows the business to have less tax liability, thus lowering the tax amount the business pays. However, 280E greatly restricts the tax deductions of state-legal marijuana businesses.
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What is 280E?
The 26 U.S. Code Section 280E is the federal statute mandated by the Internal Revenue Service (IRS) opposing “illegal” business. Marijuana is still defined as “illegal” business by the IRS, as it’s federally illegal by the Controlled Substances Act (CSA). Since licensed marijuana businesses are legal in legal states, how do you collect deductions?
How Cannabis Business Revenue is Treated by the IRS
Many people ask the question of how a cannabis business’ revenue is treated by the IRS. Even though many states legalized adult-use and/or medical marijuana, it still remains federally illegal as a Schedule I drug. This creates a conundrum for businesses, who would not only like to pay taxes, but also take advantage of business deductions that are available to almost every other industry.
Section 280E results in a much higher taxable income. This causes cannabis businesses to pay substantially more in taxes, resulting in an increased effective tax rate. Under 280E, the only deduction a cannabis business can take is its Cost of Goods Sold (COGS); not the regular deductions such as salaries, utilities, health insurance premiums, etc. Cost of goods sold are the costs of producing a “good “sold by a company. For example, below is a table that displays how 280E affects a business’s taxes.
| Regular Business | Cannabis Business | |
|---|---|---|
| Gross Revenue | $2,000,000 | $2,000,000 |
| Cost of Goods Sold | $1,000,000 | $1,000,000 |
| Gross Income | $1,000,000 | $1,000,000 |
| Deductible Business Expenses | $600,000 | $0 |
| Taxable Income | $400,000 | $1,000,000 |
| Tax (30%) | $120,000 | $300,000 |
| Tax Rate (Effective) | 30% | 75% |
Therefore, under Section 280E, a marijuana business pays significantly higher taxes than a non-cannabis business. This leaves less money for the cannabis business to reinvest, raise wages, or invest in social equity.
Need cannabis business tax services? Request a consultation now.
How to Alleviate the 280E Marijuana Headache
How can we change the current tax situation? First and foremost, cannabis must be removed from the Controlled Substances list. Additionally, there are several members of Congress that are introducing bills to allow cannabis businesses, who are compliant with state law, to take receive traditional business deductions.
It’s imperative to understand how the tax structure affects cannabis businesses. Here at the Cannabis Law Group, we are in-the-know of the existing regulations and structures to ensure that you receive the best possible legal counsel.
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