August17 , 2022

Everything cannabis entrepreneurs should know about the 280e tax code

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Even with the ever-expanding and profitable cannabis industry, one thing makes taxes feel like death—the 280e tax code. If you’re a newcomer to the cannabis industry, you’ll want to learn everything you can about 280e and more.

Cannabis and the 280e tax code

Cannabis is quickly becoming a multibillion-dollar industry. Of course, because it is a new and recently legalized business, regulations have yet to favor it. This includes different state taxation laws.

The truth is that, despite its legalization and beneficial medical use in all 50 states, cannabis is still classified as a schedule-controlled substance. This means that, despite the cannabis industry’s rapid growth and de-stigmatization, entrepreneurs in the industry continue to face financial challenges.

The fact that cannabis entrepreneurs must pay a tax rate nearly four times higher than other conventional businesses is arguably the most difficult challenge for them.

Those who speculate on the subject may argue that the high taxation is due to the wealth generated by the plant as well as the scrutiny that comes with being a “cannabis dealer.” in other words, it’s a method of keeping industry owners under federal control.

Regardless of speculation, entrepreneurs must be proactive about their business responsibilities in order to avoid growing pains. In addition to state and federal distribution and compliance laws, tax liabilities and laws, beginning with the 280e tax code, must be understood and followed.

Section 280 e: What is it?

Congress passed section 280e in 1982. Its goal was to prevent taxpayers from deducting expenses related to the sale of cocaine, amphetamines, and marijuana. Previously, deductible expenses included packaging, shipping, and transportation costs, as well as the scales used to weigh the substances.

Here’s where things get murky: Medical marijuana businesses are still illegal under federal law. However, there is some overlap with state laws, as well as the fact that cannabis business owners are still required by law to pay federal income taxes. The examination focuses on determining whether the source of the total income is legal.

To put it another way, when it comes to the sale of marijuana as a schedule-controlled substance, the IRS makes no distinction between legally sourced and illegally sourced income.

Fortunately, there is a workaround

An exclusion was added to section 280e tax code as a result of congress’ irrational fear of potential constitutional challenges to the law. The relevant exclusion is known as the “cost of goods sold” exclusion.

This exception includes expenses directly related to plant production. That is, for growers, it refers to the seeds, electricity, labor, and anything else directly related to the growing and preparation of cannabis for sale.

This exception is limited to the amount paid for cannabis products for retail by dispensary owners.

So, how do business owners manage?

As the cannabis industry expands, state and federal laws continue to evolve. While the industry’s future is undeniably bright, we must still deal with the present and the past. Growers and retailers must maintain positive working relationships with all stakeholders in the supply chain, from customers to the government.

 

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