First in a series of blog posts discussing Section 280E of the federal tax code and how cannabis business owners can reduce their tax liability, taken from the recent MJ Platform webinar “280E and Tax Season” featuring Brian Cadieux, President of Cadieux and Associates.
Section 280E can cause extra stress for cannabis business owners during tax time
For cannabis business owners, tax season can create extra headaches and stress, due primarily to Section 280E of the Internal Revenue Code. Section 280E forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. As cannabis is still considered a Schedule I substance, Section 280E applies to all state-legal cannabis businesses.
The impact of Section 280E on cannabis businesses is significant. It essentially means that any business participating in the manufacture or sale of cannabis products cannot deduct any business expenses from their gross income, which makes their tax liability much higher than for other businesses. To put this in simple terms, let’s look at the following table:
| Non-cannabis business | Cannabis business | |
| Gross Revenue | $1,000,000 | $1,000,000 |
| Cost of Goods Sold | $650,000 | $650,000 |
| Gross Income | $350,000 | $350,000 |
| Deductible Business Expenses | $200,000 | $0 |
| Taxable Income | $150,000 | $350,000 |
| Tax (30%) | $45,000 | $105,000 |
| Effective Tax Rate | 30% | 70% |
The above table makes the equation appear relatively simple and shows that cannabis businesses take a significant hit, simply due to the nature of their industry.
Cannabis businesses can deduct the Cost of Goods Sold (COGS)
However, the situation is a bit more complicated than what’s illustrated above, because not all businesses are structured the same – and not all business expenses are treated equally. For example, a sole proprietorship is taxed differently than a C-Corporation. While there are many types of expenses that state-legal cannabis businesses can’t deduct, they can deduct the Cost of Goods Sold (COGS), and they can make deductions on their non-cannabis business activities. Additionally, Section 263A of the IRC allows cannabis businesses to put administrative and inventory costs under COGS, which means these costs are also deductible.
I’ll cover more about how to categorize and manage business expenses in the weeks to come. In my next post, I’ll talk about the different options for structuring a cannabis business and the tax implications of each in order to help owners determine the best path to take.
For more information about Section 280E, view our recent “280E and Tax Season” webinar, featuring Brian Cadieux of Cadieux and Associates, a Denver-based bookkeeping and tax preparation services firm. The webinar provides tips for cannabis business owners and accountants about how best to structure a cannabis business and manage expenses to reduce their tax liability.
Watch the full webinar on 280E.
The opinions expressed in this blog post are those of the author. They do not purport to reflect the opinions or views of Akerna or its family of companies. The information contained in this post is provided for informational purposes only and should not be construed as tax advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this post without seeking tax or other professional advice.
