The cannabis industry in the United States of America is gradually evolving into a multi-billion dollar business sector. It is not unusual that regulations have not been modified to suit this industry, because it is fairly new. It is also a recently legalized industry.
However, there is a cumbersome issue that bothers every cannabis entrepreneur in the country, regardless of their state's laws. This issue revolves around Section 280E, Tax code.
This tax law has made running a canna business very hard for people who have no idea how to navigate around it.
The IRS claims that all canna-businesses are illegitimate at the federal level, even though some states have legitimized it. Hence these businesses are unable to subtract most incurred expenses when filing their taxes except the cost of the products sold.
To make it worse, several financial institutions have refused to do business with entrepreneurs in the industry, irrespective of their field.
Cannabis business owners find themselves paying inflated tax rates that are almost 4 times higher than those of other businesses. Thanks to Tax code 280E, normal deductible costs cannot be subtracted. For example, costs incurred from paying rents, wages, buying machines, and even accounting cannot be excluded. Only those related to the primary cultivation of cannabis can be deducted.
Some States have issued out steps that can be taken to ease the tax burden of the cannabis business and keep them still operational and profitable.
It cannot be denied that Cannabis is still a Schedule 1 controlled substance, despite being legalized across several states and used medically in the country. But, there are speculations that the Tax code 280E is the federal government's strategy of being on top of the cannabis industry.
The 280E tax code states that "drug dealers cannot write off business expenses from illegal activity, especially Schedule I and Schedule II listed substances ". It was written into law in 1982.
Due to this, many legally operating cannabis businesses have suffered, as they are unable to write off the expenses that should be written off normally. To buttress this fact, In 2017 alone, the total cannabis business reported less than $13 billion in total sales, and the federal government collected about $4.7 billion in form of taxes. If this doesn't prove that the tax code is impartial, nothing else would.
Oddly, the medical cannabis business is still illegal, and are obliged to pay these exorbitant taxes. This is because the source of the total income is classified as illegal by the IRS.
Simply put, any business dealing with marijuana plants is illegal under the federal law of the US.
Fortunately, section 280E is not as solid as everyone assumed.
This loophole is found in the exclusion known as 'cost of goods sold'.
This exclusion comprises incurred expenses that are related to the cultivation of the plant buds.
Some of the deductible expenses include:
Raw materials: This includes the supplies needed for cultivation. E.g fertilizer, seeds, plant clones, etc.
Labour: This includes labor used during the pre-planting, planting, and harvesting of the plants. They were used for cleaning, trimming, and even packaging the product for sale.
Transport: This entails the cost of transporting the purchased seed to the farm and the shipping costs of moving the marijuana to the point of sale.
Other direct costs: Eg electricity, the maintenance cost of machines and equipment used, etc.
Dispensaries on the other hand can only exempt the cost of the product and the cost incurred while transporting it to the store.
The ways you can navigate the dreaded tax code 280E to work in your favor can be found below.
This is the initial step to successfully resist having a phantom income. Proper documentation of every action taken in the course of the business is necessary.
Having detailed and backed-up records help a business prove its numerical claims. Also, a cannabis business must have more than one employee in the financial department to keep track of the ever-growing data.
All incurred expenses must be documented in full detail with an authentic paper trail. This would better prepare the establishment for an unexpected IRS audit.
There is a unique software that can be utilized to have tax and audit information at all times. It also makes the information easily accessible and easy to read.
Having software in place saves you from various human errors. It is common knowledge that calculating and documenting tax data can be tedious. Leaving this to an employee without the use of the software could result in a lot of errors in the data.
With the right software, all tax-related documents can meticulously be arranged and recorded.
When employees are properly categorized, their wages are being rightly documented. Penalties can be avoided and money saved.
The business owners would be able to determine the employee wages that can be waived under the tax 280E.
As a business owner in the cannabis industry, federal, state, and local taxes need to be sorted out. But first, an idea of the surcharges is required.
When this is done, you can get an idea and start the process of applying to accurately maintain your tax reports.
This will help growers and retailers alike to have a proper business relationship with all levels of the business chain.
This way, the group would be a strong force in overcoming the strict regulations meted out by the federal government and IRS.
There would be support to go round as the community grows stronger. l and advocates for better policies.
Finally, be transparent in all your sales. Align your prices to the tax differences relative to your state policies.
Some cannabis businesses go the long way by stating details of tax on receipts.
While we continue to see the industry expand and thrive financially, the thought remains that it could still be bigger and better if the tax code 280E could be modified. Sadly, there is no indication that these craved modification policies will be issued any time soon.
Hence, try your best to safely navigate around this problem.
If it seems to be hard to handle, there are experienced advisors skilled in working around Tax 280E for cannabis business owners.