How to Navigate the Dreaded 280E Tax Code
Opinions expressed by Contractor the contributors are theirs.
When it comes to running a cannabis business, one glaring problem persists: the IRS says cannabis businesses are illegal and can’t deduct most expenses when filing taxes, despite being tax-deductible. legal at the state level. To add insult to injury, most banks won’t work with anyone in the industry, whether they touch plants or not.
How is tax filing possible for an illegal business? To understand, you have to go back to the 1980s. An illicit drug dealer named Jeffrey Edmonson sued the United States Tax Court while deducting business expenses from his highly illegal cocaine, amphetamines and drug trafficking scheme. cannabis.
You would think the court would have quickly dismissed the case, but the United States Tax Court actually ruled in its favor. Edmonson was allowed to deduct certain business expenses from his illegal drug trafficking business, including cost of goods sold (COGS), housekeeping expenses, packaging, phone expenses, and even the use of his vehicle.
Related: How Much Do States Earn in Marijuana Tax Revenue?
Enter tax code 280E
After this embarrassing failure in court, the US Tax Court moved quickly to put things right, and the courts overturned the case the following year. The IRS then implemented tax code 280E, which states that drug traffickers cannot deduct business expenses for illicit activities, especially drugs listed on the Annex I and Annex II substance lists. It makes sense that the courts never gave Edmonson the power to write off expenses in the first place as a criminal. However, the IRS guidelines have further ruled that even illegal businesses, which still owe taxes, can deduct a few specific items from their gross income. This article goes into more detail on deductions and audits.
When individual states began to legalize cannabis and legal businesses were established, legally operating cannabis businesses suffered and could not recoup as much expense as businesses in other industries. The US government reported a staggering collection of $4.7 billion in cannabis taxes in 2017, despite cannabis companies reporting just under $13 billion in total sales, signaling an imbalance .
The policy is unfair and makes no sense. It’s easy for cannabis business owners to get frustrated and complain that taxes should be easier, but the best solution, for now, is for businesses to use their voice to advocate for change. while navigating the nuances of tax law in a technically illicit industry. . Here are some tax tips for 2021.
Document, document, document
The first thing cannabis businesses can do to combat tax code 280E is to thoroughly document every move you make.
It’s not sexy to talk about it, but cost of goods sold (COGS) are the only eligible business expenses to deduct from gross income and reduce tax liability. To successfully deduct this expense from taxes, companies must have complete documentation that proves their digital claims. Make sure there is more than one person on your farm who knows the financial data, back up all your data, and remember that spreadsheets only tell part of the story. Using an ERP or cannabis-specific track and trace software can ensure that you have tax and audit information available and easily accessible to anyone who needs it at a glance. instant.
Alterman vs Commissioner is a 2018 case that highlights the importance of foolproof record keeping in the cannabis industry. The service ended up denying Laurel Alterman’s appeal to deduct cannabis-related business expenses from her retail store in Colorado. The court has indeed determined the shortcomings and penalties related to accuracy for 2010 of $157,821 $31,564 and for 2011 of $233,421 and $46,684. She did not separate her cannabis-related expenses from non-cannabis-related expenses and therefore could not deduct business expenses of either business.
Get good software
It is not difficult to document correctly. We are already required to have software in place for track and trace regulations, so why not use the same software to meticulously document for tax purposes? The cannabis industry needs all the tax relief available, and we only received one category. If the IRS knocks on your door, the correct data from the correct software sends them.
Know what to deduct under 280E
Here are some things cannabis businesses need to track and can deduct from their business expenses:
- Price charged for cannabis;
- Transportation (including the cost and expenses of shipping cannabis and travel expenses to purchase it);
- Electricity (can only be deducted in inventory areas, not on sales floors);
- Raw materials and supplies for cultivation (such as seeds, clones, fertilizers, etc.);
- Direct labor before sale (cleaning, packaging, pruning, harvesting, etc.); and
- Indirect costs like equipment maintenance, tools used to grow cannabis, etc.
Autonomous dispensaries are limited to deducting: the cost of the product and the cost of acquiring the merchandise, including the cost of transport to buy in bulk.
Don’t let human error ruin tax season
It is unwise to rely on humans to calculate such tedious information. This anecdotal observation proves the deep need for cannabis-rooted, multi-functional and deep software that integrates with all businesses and meets their unique needs as a “technically illegal” business.
Colton Griffin is CEO of Flourish Software, a technology provider of supply chain and enterprise inventory management software designed for cannabis, CBD and hemp operations. It can be attached to firstname.lastname@example.org.