The Best Way to File Taxes for a Cannabis Business

Taxation for the cannabis industry is complicated, as there are many restrictions and confusing elements for a legitimate cannabis business. Knowing what to add to your tax information can be beneficial or daunting to any business, so review below for more information on Section 280E:

What is Section 280E?

U.S. Code § Section 280E states that no business shall be allowed to deduct or credit any amount paid during the taxable year if it consists of trafficking in controlled substances prohibited by federal or state law in which such trade or business is conducted.

Section 280E prevents cannabis companies from deducting expenses from their income, except for those considered cost of goods sold. This may come as a surprise to many dispensary owners, adult-use retailers, growers, manufacturers, and other cannabis businesses.

How Does Section 280E Work for a Cannabis Business?

Cannabis businesses pay taxes on gross income. If you run a dispensary for medicinal or recreational purposes, you can deduct COGS (cost of goods sold), and only run the expenses of the cost of the marijuana and anything else, like shipping, that make up the total for COGS. Keep very detailed records.

Cannabis businesses pay taxes on gross income. If you run a dispensary for medicinal or recreational purposes or are a cultivator or manufacturer you can deduct COGS. The items that fall under COGS include:

  • Producers – Cultivation and Manufacturing*
    • Packaging (Branded products as well)
    • Repair expenses
    • Maintenance
    • Utilities
    • Rent
    • Payroll
    • Indirect materials and supplies
    • Tools / Equipment
    • Quality control costs
  • Retailer/Dispensary Owner
    • Packaging (Branded products as well)
    • Administrative expenses
    • Invoice price of purchased cannabis
    • Transportation
    • Other costs necessary to gain possession of inventory

If you run two cannabis businesses under one roof, it is permissible to deduct a portion of expenses for each business. Adding patient services such as advocacy, drug counseling, or bringing in medical speakers is permissible. Like all other businesses, make sure to keep receipts and document all financial business transactions as the IRS may request information to approve your tax write-off.

Why is Branding Cannabis Packaging Important to Cannabis Businesses?

There are many struggles involved with marketing in the cannabis space. Since cannabis is federally illegal, a lot of social media applications, publications, and other marketing outlets will not support sponsored/boosted posts that contain cannabis content.  By adding brands to packaged goods, it is considered a great investment as it contributes to marketing efforts by creating brand awareness and loyalty, plus businesses can write it off as COGS! Branded packaging and containers fall under “Cost of Goods Sold” because it is considered an integral part of the finished product.

 

Maintain Long-Lasting Relationships

Maintaining a strong working relationship with the IRS legitimizes businesses and the entire cannabis industry. Side-stepping the IRS would lead to long and expensive audits, as well as lawsuits that will challenge the IRS memo and 280E as a whole. If you have additional questions or comments on this information, then let’s have a conversation.

 

*COGS – From California Cannabis