9375 E. Shea Blvd. Suite #100, Scottsdale Az 85268
9375 E. Shea Blvd. Suite #100, Scottsdale Az 85268
IRC 280E is a section of the Internal Revenue Code that specifically applies to businesses that engage in the sale or distribution of controlled substances. This section prohibits businesses from deducting ordinary business expenses from gross income if they are trafficking controlled substances found on Schedule 1 or Schedule 2 of The Controlled Substance Act. This includes marijuana which is listed as a Schedule 1 drug and considered a controlled substance under federal law. As a result, these businesses can end up paying significantly higher taxes than other businesses.
While IRC 280E was originally intended to target illegal drug trafficking operations, it has had a significant impact on legal marijuana businesses in states where cannabis has been legalized for medical or recreational use. Despite the fact that marijuana is legal in these states, it remains illegal under federal law, which means that these businesses are still subject to the restrictions of IRC 280E.
Under the Controlled Substances Act (“CSA”), “trafficking” a controlled substance refers to the manufacture, distribution, dispensation, or possession with the intent to distribute a controlled substance. This includes any activity involved in the transfer of a controlled substance from one person to another, whether or not money or any other form of compensation is involved.
Trafficking can include a range of activities, from small-scale distribution to large-scale drug trafficking operations. The CSA classifies controlled substances into five schedules based on their potential for abuse and accepted medical use, and penalties for trafficking can vary depending on the schedule of the drug involved and the amount being trafficked.
The penalties for trafficking a controlled substance can be severe, including lengthy prison sentences and large fines. In addition to federal law, states may also have their own laws regarding the trafficking of controlled substances, and penalties may vary by state.
It is important to note that trafficking a controlled substance is illegal under federal law, even if the substance is legal in a particular state for medical or recreational use. This can create challenges for businesses operating in the cannabis industry, which is legal in some states but remains illegal under federal law.
In a number of cases, the Tax Court has held that Cost of Goods Sold (“COGS”) for a marijuana business should be treated as an adjustment to gross income, rather than a deduction. The rationale for this is that COGS is not an ordinary business expense in the same way that rent, wages, or marketing costs are. Instead, COGS is considered to be a direct cost of producing or acquiring the product being sold.
In cases such as Olive v. Commissioner and Patients Mutual Assistance Collective Corp. v. Commissioner, the Tax Court has held that the COGS for a marijuana business is properly calculated using the inventory accounting method required by Section 471 of the Internal Revenue Code. Under this method, the cost of goods sold is the sum of the cost of the inventory items sold during the tax year.
If you look at a federal corporate tax return—form 1120—you can see that the formula to arrive at total income is Gross receipts or sales — Cost of goods sold.
By treating the COGS as an adjustment to gross income rather than a deduction, the Tax Court has effectively allowed marijuana businesses to reduce their taxable income by the amount of their COGS, even though they are not allowed to deduct other ordinary business expenses. This has been an important consideration for marijuana businesses that are subject to IRC 280E, as it has allowed them to reduce their tax liability to some extent. However, the precise calculation of COGS remains a complex and highly contested issue in the context of IRC 280e Tax Law, and businesses operating in the cannabis industry should work with experienced cannabis CPAs and cannabis tax professionals like CannabisAccounting.io who possess the necessary expertise to ensure that they are complying with all applicable tax laws and regulations.
As a cannabis company, navigating the complex and ever-changing landscape of regulations and laws can be a daunting task. Unfortunately, many CPA firms and bookkeepers are not well-versed in the intricacies of IRS Section 280E, which can lead to costly mistakes and missed opportunities for tax savings. Additionally, preparing financial statements in compliance with Section 280E can be a challenge for bookkeepers and accountants who lack experience in this area.
Furthermore, understanding the unique state laws and regulations outside of your home state can be difficult for most accounting firms. Finding the right support partner who is knowledgeable in these areas can be a challenge, especially since some professionals may still hold negative perceptions about the cannabis industry.
Ultimately, getting consistent attention and direction to ensure your business is operating at its highest level can be hard to come by. However, with the right team of experienced and knowledgeable cannabis CPAs, cannabis bookkeepers, and cannabis CFOs on your side, you can overcome these challenges and thrive in this dynamic industry.
The Profit First method is an innovative financial management system developed by entrepreneur Mike Michalowicz. This system is designed to help businesses of all sizes improve their cash flow, increase profitability, and build financial reserves.At its core, the Profit First method involves dividing a business’s revenue into different accounts, each with a specific purpose. These accounts include profit, owner’s pay, taxes, and operating expenses. By allocating revenue in this way, businesses can gain greater visibility into their finances and ensure that they have the funds they need to cover expenses, pay taxes, and, most importantly, prioritize and generate profit.
For cannabis businesses, implementing the Profit First method can be particularly beneficial. Due to the unique financial challenges faced by this industry, such as high tax rates and limited access to banking services, managing cash flow and planning for future expenses can be particularly difficult. However, by using the Profit First method, cannabis businesses can gain a clearer understanding of their finances and achieve greater success in their operations.
At CannabisAccounting.io, we understand the importance of sound financial management practices for cannabis businesses. That’s why we’re proud to offer expert guidance on implementing the Profit First method for your business. Our team of experienced professionals can help you set up different accounts for various expenses, identify key financial metrics to track and develop a regular review process to ensure that the system is working effectively.
By implementing the Profit First method, you can improve your cash flow, increase profitability, and build a stronger financial foundation for your cannabis business. To learn more about how we can help you implement this system in your operations, contact us today.
Accurate and compliant cannabis bookkeeping and accounting is essential for any cannabis business, but it can be particularly challenging given the unique regulations and tax laws of this industry. CannabisAccounting.io offers cannabis bookkeeping services tailored to meet the specific needs of all cannabis verticals.
Our experienced bookkeeping department understands the ins and outs of Section 280E and will ensure that your financial statements and books accurately reflect your costs in compliance with this IRS provision. Beyond compliance, we also provide meaningful and actionable insights into your business based on your financial data, so you can make informed decisions and drive growth.
Let us take care of your bookkeeping needs, so you can focus on what you do best – running and growing your business. With our expert guidance and support, you can rest easy knowing that your financials are in good hands.
