History of 280E
Section 280E prohibits cannabis companies from deducting what would typically be deductible business expenses. In 1982 it was the height of drug hysteria and increased drug-related incarceration rates. 280E was created in reaction to a court case (Edmondson, T.C. Memo. 1981-623) in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses (such as rent, advertising, and employee salaries). Congress created 280E to prevent other drug dealers from following suit.
Jumping back to today, legitimate, state-legal businesses are building compliant operations to provide access to medical marijuana and adult-use cannabis, yet still must face the burden of paying taxes for average business expenses.
- IRS 280E in total (as of 11/2020): “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
What does this mean for Canna-Businesses?
Other Businesses:
- Revenue: $3,000,000
- COGS: $2,000,000
- Gross Profit: $1,000,000
- Deductible Business Expenses: $600,000
- Taxable Income: $400,000
Canna-Businesses
- Revenue: $3,000,000
- COGS: $2,000,000
- Gross Profit: $1,000,000
- Deductible Business Expenses: $0
- Taxable Income: $1,000,000
Why?
- Reduction of deductions = increased taxable income
- Marijuana companies face higher federal tax rates: 40 – 80% vs 21% corporate tax
Yes, you can work to add as much into your COGS as possible, but we need to be realistic here. To have real business growth in cannabis, the solution is to look beyond your financial statements.
Solution 1: Categorize expenses into COGS as much as practical! See the image below on what you cannot add to your cost of goods sold.
Solution 2: Look beyond your financial statements for growth! This is where Full Cycle CFO can come in.
The Full Cycle CFO Difference
Why Choose Our Team For Your Accounting?
Business growth regarding 280E comes down to two main categories: staying compliant and business strategy. To remain compliant with this tax code, there are substantiation requirements and building procedures to track. This is accomplished with effective bookkeeping and software.
280E makes it particularly challenging to manage the finances of a cannabis business. Profitability is not easily found within the financial statements, so it is critical to look beyond them and find new opportunities for efficiencies. This happens outside of your bookkeeping, and the second solution: is business strategy.
For effective business strategy, we will work with you to provide:
- Creating financial transparency to put you and your team in the driver’s seat of your business.
- Focus on key performance indicators to set business goals that result in desired outcomes (i.e., more profit).
- Prioritize strategic planning sessions with your team to increase profitability and efficiency.
- Assist you in building your business with purpose by implementing systems.
- Effective business models to pursue valuable revenue because not all revenue is good revenue.
- And more customized service depending on your specific business needs.