Federal and state laws have always conflicted when it comes to cannabis. Cannabis businesses are trying to keep up with compliance which makes 280E important. Even though states now permit legal medicinal or adult use of cannabis, it is still a Schedule I controlled substance under the CSA or Controlled Substances Act. This makes the cannabis business compliant with state law but could create challenges federally. Learn more about how 280E impacts cannabis businesses and how to navigate compliance.
What to Know About Section 280E
Section 280E is a federal statute that bars businesses, or a portion of the business, from engaging in the trafficking of Schedule I or II controlled substances (like cannabis). They cannot deduct non-COGS-related deductions or credits for federal tax purposes. This penalization can be a challenge for rising dispensaries and cannabis businesses that abide by new state laws allowing them to sell cannabis under certain rules. Simple business decisions like accounting and ownership structure are critical to mitigate risks and compliance issues. The effect Section 280E can have on possible deductions may impact tax rates and bills for businesses, sometimes shoving them straight into red territory rather than profitability. The IRS is struggling to issue guidance on Section 280E and enforcement is inconsistent at best. They have not yet really started auditing cannabis licensees and taxpayers are not sure how deep the trails will follow plant-touching dollars to find the money for compliance.
Primary & Secondary Trades
Cannabis licensees operating more than one license type or licensed location may want to consider these as separate trades or businesses. Cannabis businesses affected by Section 280E may want to establish a primary trade or business such as small retail shops or cultivation facilities operated by the same licensee. This approach may reduce the effect of Section 280E by permitting deductions and creating business expenses that might not be allowed for more heavily affected businesses.
Considerations for Businesses
In consideration of this impact on cannabis businesses, it may help to try some of the following:
- Prepare and maintain separate financial statements, books and records, time clocks, HR records, and more
- Keep separate titles, job functions, and descriptions for each business
- Establish an applied methodology for shared expenses including common area maintenance charges
- Consider ramifications and implications for taxes to keep them together versus separate
Why it Matters
Federal and state law may not be in agreement for quite some time. This presents significant financial risks for cannabis businesses. There are safeguards and plans to create space for this to operate in a healthy financial way without undue risk. However, Section 280E should be taken into consideration with a respected and well-versed accountant who can keep track of the changes in the tax code and adjust accordingly. Cannabis businesses who are wise to Section 280E compliance may be better off in the end for keeping strict books and records in the long run.
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