Over the years, cannabis was criminalized, decriminalized, and then again criminalized. Oklahoma has now legalized cannabis. It is evident that legitimate businesses are thriving and cannabis will continue to be decriminalized.
It is still illegal technically, even though it has been legalized for medical or recreational use across the state.
To keep their legal cannabis businesses afloat, cannabis entrepreneurs must navigate the maze of hell and high waters. It may sound confusing. The 280e tax code, especially around tax season, can make it difficult for businesses to generate revenue. There's help. Keep reading to find out about the tax code 280e, as well as how to navigate them.
The 280e Revenue Code and its Challenges
The 280e Tax Code is a problem for cannabis entrepreneurs from all across America. It all dates back to Ronald Reagan's declaration about the war against drug abuse. Specific to the IRS tax code, 280e was introduced in 1981. This year, in particular was a tax court hearing where convicted cannabis, cocaine, and amphetamine trafficker fought for his rights as a federal tax payer.
Unfortunately, the 280e Tax Code is still punishing cannabis business owners today.
What Is Section 280e?
The 26 U.S. Code Article 280e, which is the federal statute that the IRS mandates to stop "illegal” business practices, is Section 280e. Section 280e says that businesses are prohibited from deducting expenses from the gross income for "trafficking" schedule I or II controlled substances. It also applies to taking credit.
Marijuana still falls under the Schedule control substance classification. Therefore, it is federally illegal. Even though cannabis is legal in all states for medical and recreational purposes, federal law considers all cannabis businesses drug traffickers. This means that all cannabis entrepreneurs will have to pay taxes for all their business income. To reduce their taxable income, they cannot write off business expenses.
The Cost of Goods Sold
The exception to the rule is the cost-of-goods sold (COGS). But it's not by much. Section 281e to address constitutional concerns. To counter any potential legal challenges in the future, they added an exclusion to this law. This exclusion allows for deduction of the costs of goods sold even for products prohibited by federal law.
The cost for goods sold mostly refers to inventory costs. This includes the cost for the actual product, shipping costs (to retail locations), and any other directly related expenses.
If you are in the cannabis business and need to know how to comply with the IRS 280e code, you should check out polstontax.com. This site provides a detailed guide on everything from banking and tax planning for cannabis businesses to a compliance checklist for growers, processors, and retailers.
How can you effectively maximize deductions?
The 280e Tax Code has a significant negative effect on the cannabis market. There are ways to reduce the tax burden. It all begins with good accounting and compliance. These are some of the things you should consider.
Design a Better Corporate Organization
Three types of corporate structures are available for new business owners. C-corporations can be either S-corporations or C-corporations. Limited Liability corporations are also available (LLC).
Most lawyers will advise cannabis entrepreneurs to form a Corporation. C-corporations allow business owners the flexibility to only pay taxes on their salary and dividends.