Section 280E of the Internal Revenue Code states that businesses selling cannabis (or any other federally illegal controlled substance) cannot deduct any expenses incurred in the production, distribution, and sale of that product.
As long as marijuana is considered a Schedule I drug under the Controlled Substances Act, cannabis companies are forced to abide by 280E.
What 280E means for your legal cannabis business
It means federal law doesn’t allow you to deduct many of the same expenses that a non-cannabis business can. It also means it costs more to operate a cannabis business.
Many cannabis businesses are feeling the burden of Section 280E, which can have the effect of taxing direct-to-plant businesses at a rate up to 3.5 times higher than other businesses.National Cannabis Industry Association
The fact is, you’re going to be limited in what you can do under 280E until cannabis becomes federally legal or loses it's Schedule 1 drug status. Take 280E seriously while it’s in effect to avoid heavy legal penalties.
What you can deduct on your business tax return
Simply put, you can deduct cost of goods sold (COGS), which includes all the costs and expenses directly related to the production of goods.
Standalone cannabis retailers can claim deductions for:
- The invoice price for cannabis, less trade or other discounts.
- Any electric bills for designated inventory areas (electricity used in any sales area can’t be deducted).
- Transportation: The cost of travel to purchase cannabis and legal shipping costs associated with marijuana.
Since COGS are the only deductible business expense under 280E, make sure to deduct them!
If you're a cannabis cultivator or a vertically-integrated dispensary, see this 280E Deductible COGS guide from WURK for further deductions.
What you CAN'T deduct on your business tax return
Literally everything except COGS is not deductible for cannabis entrepreneurs, including (but not limited to):
- Contract labor
- Equipment/equipment repairs
- Inventory costs
- Display cases
- Professional fees
- Licenses and fees
- Other ordinary business expenses not listed above
See a full list of non-deductibles here.
Note: Conduct careful analysis with your attorney before making any final decisions on what to deduct.
Keep accurate business deduction records
When dealing with federal law, the more detailed your records, the better.
Invest in good marijuana business management software to make record-keeping easier.
When operating a cannabis business, the odds of IRS audit increase substantially. There are reports that 10% to 15% of cannabis businesses get audited.Cannabis Business Professionals of Oklahoma
And a solid relationship with an accounting firm that knows the cannabis industry well will be invaluable if/when you face an audit.
What if we reformed Section 280E?
Section 280E was created to prevent drug dealers from writing off their expenses, but it wasn’t intended to impact legitimate businesses.
You may be wondering why the government would continue using a tax law that negatively impacts small businesses. It's actually a mystery to us all because 280E also impacts their revenue.
In fact, if the government were to do away with Section 280E, they would see benefits in the long term. They'd receive less immediate cash, but an increase in federal tax receipts over 10 years.
Dispensaries would also see huge benefits, and so would their employees, communities, and customers. If cannabis business owners are allowed normal tax deductions, they could raise wages, provide better benefits, donate money, and lower their prices.
Ideally, this post will become obsolete in the near term, but for now, hopefully you have more understanding of how 280E impacts cannabis businesses, what you can and can't deduct, and resources for further learning.
Disclaimer: This post is intended to be educational only, and does not include legal advice. Talk to your lawyer or CPA to learn more about how 280E applies to your cannabis business.