Many state governments are changing their laws regarding the legal legitimacy of marijuana businesses. While one state may allow certain businesses to operate under a legal umbrella, another state may completely outlaw their businesses.
Code 280E is a tax code that has made an already difficult legal field that much more complex. The IRS code 280E states any person who “engages in a trade or business involving the production, manufacture, or distribution of controlled substances (the trade or business of selling marijuana)” is subject to penalties. This code can tack on a 10% penalty on annual profits, as well as an additional 25% penalty on any penalties incurred because of violations of the code.
The Internal Revenue Service code 280E is a major thorn in the side of legal cannabis businesses. It is a subset of the federal Controlled Substances Act of 1970, and it has been in place since the 1970s, when the IRS ruled that cannabis would be considered a Schedule 1 drug (the most restrictive classification under the Controlled Substances Act) and therefore subject to federal income tax. As stated at 28 C.F.R. Section 5312, Schedule 1 consists of “the drugs and other substances, by whatever official, common, usual, chemical, or trade name, or in whatever quantity, which the Secretary finds to have, for use, to possess, or to be capable of abuse, and which the manufacturer, distributor, or labCannabis is a lucrative business and always has been. During Prohibition, those who provided users and patients with drugs ranging from semen to sesh had to work to make money. Unfortunately, cannabis businesses operating under local and state laws must do the same even today, with the added headache of the IRS 280E tax code.
While some cannabis businesses have been able to partner with local credit unions and state registered banks, this comes with significant challenges and risks for all parties involved. Because cannabis is still illegal at the federal level, banks and financial institutions cannot partner with cannabis companies operating in legal state markets. This has caused a lot of headaches and risks for companies over the years.
Speaking of headaches, IRS tax code 280E is the pain in the ass that almost every cannabis business owner puts at the top of their annual hardship list. This tax law was passed after a court case in the 1980s. The case arose after a convicted cocaine dealer claimed a deduction for ordinary business expenses under federal tax law, the National Cannabis Industry Association said in a statement.
The 280E tax law was enacted for felons, not qualifiedbusinesses.
By passing 280E, Congress could enact rules that prevent illegal drug traffickers from deducting expenses such as employee wages, rent, utilities and advertising. Today, however, thousands of legal cannabis businesses operating in regulated markets under state laws are plagued by a tax code designed to combat illegal activity that is in dire need of reform.
If you do not allow these deductions for a business, you increase the amount of taxable income on which the business must pay taxes, which can result in a significant tax liability. Especially since the federal tax rate for most businesses averages 21%, but cannabis businesses that must comply with the 280E Code can face federal tax rates of 40% to 80%.
According to attorney James Mann, the 16th Amendment states. Constitutional amendment that an income tax may be imposed. And the first argument is that because 280E results in a tax that doesn’t affect income, it’s not an income tax, and is therefore unconstitutional. In 2020, Mann appealed to the United States Court of Appeals for the Ninth Circuit in San Francisco. It was on behalf of Harborside Health Center, a cannabis retailer in Oakland, California.
The way 280E is drafted directly affects the trade in cannabis products. Businesses in the retail sector have the greatest impact. Companies engaged in cultivation, processing, extraction, infusion and retailing are covered by this tax code. 280E may apply wherever wholesale cannabis is involved.
COGS for cannabis businesses is confusing
Investopedia.com defines COGS, or cost of goods sold, as the cost of acquiring or producing the products a company sells in a period, so that only costs directly related to producing the product are included, including labor and production overhead.
According to IRS Section 280E, cannabis businesses can only deduct inventory costs as a cost of goods sold. Knowing what can and cannot be deducted as COGS can be quite confusing for cannabis businesses. Here is a brief overview.
- All costs that are not part of the COGS are considered non-deductible.
- Cannabis growers can claim deductions for raw materials such as clones, seeds and fertilizers.
- Indirect production costs such as repairs and maintenance of production equipment, costs of water and electricity for growing cannabis, grower’s consumables and packaging, quality control and inspection costs, and indirect wages such as supervisors’ salaries are deductible.
- For cannabis growers, direct labor costs incurred prior to the sale of the product for purposes such as cleaning, processing, trimming, packaging, and inventory can also be deducted as overhead costs.
- Cannabis dealers, such as. B. Dispensaries, for example, B. Claiming transportation expenses, including travel expenses for the purchase of cannabis, the delivery of cannabis, or the transportation of cannabis.
- Dispensaries may also claim a deduction from the GIC for energy costs, except for electricity used in the retail space.
To remain compliant with these tax laws, cannabis companies must be vigilant. Cannabis businesses are strongly encouraged to work with a chartered accountant, also known as a CPA. In most cases, all cannabis businesses eventually face tax audits. Therefore, it is best to keep clear and concise accounts so that you are ready when the time comes.
Has IRS tax code 280E become a problem for your business? Tell us about your experience in the comments below to continue the conversation!
Ashley Priest is a patient, mother, entrepreneur and activist fighting for the abolition of drug prohibition around the world, for a better future for all. Ashley is passionate about sharing knowledge about the divine plant that is cannabis. She believes that one seed can make all the difference and that together, through education, we can end the stigma that prevents cannabis from reaching its full potential worldwide.A slew of recent court rulings since the beginning of 2017 has added to the uncertainty that surrounds the current legal status of cannabis in the United States. Until the IRS’s Tax Code 280E is amended, the U.S. government will continue to seek out legal means of making the possession and use of cannabis a criminal offense. This means legitimate legal cannabis businesses will be forced to operate illegally for the foreseeable future, which in turn results in billions of dollars in tax revenue that is currently being funneled into the federal black hole. How did this all come to pass?. Read more about 280e chart of accounts and let us know what you think.
Frequently Asked Questions
What is IRS code 280E?
The IRS Code 280E is a provision of the Internal Revenue Code (IRC), which in brief is a tax code passed by the United States Congress that is enacted in order to regulate the taxation of financial transactions involving cannabis and other controlled substances. IRS Code 280E is not a tax code. It is an anti-tax code. So, what is it? It is the Internal Revenue Service Code created to discourage American citizens from using federally-approved medical marijuana. I’m not talking about the dried flowers in a dispensary. I’m talking about the oil, extracts, edibles, concentrates, and vaporizers (and the accessories).
What is Section 280E of the Revenue Code and how it affects businesses?
The Internal Revenue Service (IRS) allows companies to engage in “businesses arising from the sale of marijuana”. However, under Section 280E of the Internal Revenue Code, this business may be denied IRS tax exemptions. The IRS will not allow any deduction for marijuana profits (either as an expense or a loss). The only exception is if there is an “allocation of profits” made by the business. If you are a business owner, you have a responsibility to pay your taxes. If you are a business owner in Colorado, you must pay taxes on your business based on its total income. The business tax in Colorado is two-fold: the 1.9% state sales tax and the 6.66% state tax on gross receipts (the “state business tax”). The state sales tax and the state tax on gross receipts are known as the Combined Reporting System.
Does 280E apply to growers?
Wanna know where to buy weed? Maybe you’re a part-time grower and would like to sell your crop, or you want to buy a few pounds of herb for a special occasion like a social gathering at home or on the weekend. If so, you’ll definitely want to read up on the 280E tax code. 280E is a tax code provision that can apply to a wide variety of business transactions, and it can be a major thorn in the side of U.S. businesses that engage in the legal cannabis industry. One of the most common questions we’re asked here at reachweed is, “Does 280E apply to growers?” In this post, we’ll dive deeper into the basics of 280E, explain the differences between 280E and 280G, discuss how to deal with it if you’re caught in the grip of 280E, and provide a few examples of businesses caught in the crosshairs of 280E.
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