July 15, 2019

Cannabis Banking and Understanding The 280E Tax Code

by McKenzie Swisshelm

 

Read Time: 5.5 mins.

 

We probably aren’t the first ones to tell you that when it comes to your cannabis business and banking solutions, the financial challenges, such as the 280E tax code, are the ones you simply can’t avoid or overlook. 

Even though your cannabis business operates in a cannabis-legal state, the federal government still has control over how they tax you, as well as other areas of your business, such as how you pay your employees. 

So, when it comes to the tax codes your business must abide by, where does it leave you? How can you make sure your business won’t suffer financially because of such steep tax rates? 

Before we dive into some possible solutions for your cannabis banking issues, we first want to bring you up to speed on what the 280E tax code is and how it significantly applies within the cannabis workforce. 

 

An article published by Forbes explains the 280E tax code as “... The federal statute that states that a business engaging in the trafficking of a Schedule I or II controlled substance (cannabis!) is barred from taking tax deductions or credits. In short, cannabis entrepreneurs must pay taxes on all of their revenue without the benefit of being able to use business expenses to reduce their taxable income.

 

Prohibiting cannabis businesses from taking tax deductions can be extremely problematic for many business owners, especially if they’re just starting off or new to the industry. Cannabis operations can even pay a tax rate of up to 80% more than their neighboring non-cannabis companies because of this code. What a tough pill to swallow!   

Follow along as we provide more information on the regulations of the 280E tax code, and measures you can take to make sure all of your business profits aren’t in total jeopardy while also abiding by the rules of the IRS. 

 

 

280E Tax Code and Your Cannabusiness: The Facts

 

Unfortunately, because of the industry you’re in, you’re unable to take normal deductions that most other businesses can. 

If you’re thinking to yourself, “Well, that’s just not fair,” you’re right! We agree it’s not fair, especially in today’s day and age where the legal sale of cannabis isn’t such a taboo or uncomfortable topic anymore. 

One of the most important things for cannabis companies to understand is how critical it is to educate yourself on the policies of cannabis business banking, and the direct effects it has on you and your employees. The more educated you are about the industry you operate in, the easier it’ll be for your business to flourish. 

 

When it comes to the 280E tax code and the regulations on deductions, it’s necessary to know that:

  • The federal government and the IRS consider cannabis businesses as trafficking a controlled substance, and no deductions can be made for any company who is put into this bracket. 

  • The IRS mandates any expense that is not part of the cost of goods sold by the business is not deductible. 

  • Labor that’s considered “inventorial cost” can be included within the cost of goods. Typically, most work associated with cultivation and extraction (cannabis) are direct costs of production and considered inventorial costs. 

  • The salaries of cannabis employees or managers might not always reflect direct wages, preventing deductions. 

 

There’s much discussion when it comes to the exceptions of the cost of goods within a cannabis business. When the 280E tax code passed, the federal government worried about potential constitutional challenges to the law. 

To eliminate any difficulties, the government added an exclusion to the tax code, allowing a deduction for the cost of goods sold even where the products are illegal under federal law. 

Meaning that the costs of goods sold are inventory costs, including the value of the product itself, the cost to ship the product, and any other direct expenses.

This is a tricky concept, and to understand it a little more, we’ll quote another piece from the Forbes article we referenced earlier, “Even though the cost of goods sold is still deductible, unfortunately, the IRS applies its definition more narrowly to cannabis companies.” Read the memo.

 

For example, it does not allow the use of tax changes that allow more indirect costs to be included in costs of goods sold because those were made after Section 280E went into effect. This means that cannabis companies may not be able to use the same accounting methods as other businesses, which could result in less favorable treatment by the IRS.

 

 

How Can My Business Legally Operate Around The 280E Tax Code? 

 

Just because there are certain limitations within your industry doesn’t mean you can’t learn and practice other solutions to ensure your business is flourishing and your employees are happy—while legally following federal rules and laws. 

Speaking of happy employees, we recently published an article on some best practices of cannabis employee payroll you might find interesting, Cannabis Business: How Do Dispensaries Pay Their Employees?

Take a look below at some great ways you can successfully operate your cannabis business within the limits of the 280E tax code:

 

Partner With A Credible Team

One of the best ways to ensure your cannabis business is complying with all federal rules and regulations is by partnering with a cannabis HR and banking company. 

A company who solely specializes in servicing clients of the cannabis industry can successfully navigate the 280E tax code using different approaches and business structures tailored to your company needs. 

As the cannabis industry continues to grow, an excellent cannabis HR and banking company realizes the need to protect your investments. What your business needs are industry experts in human resources, business development, and tax law, (specifically 280E tax law) to guide you through the legal labyrinth of this highly-regulated industry, keeping you compliant and your business protected.

 

Keep Your Records Organized and Relevant 

After reading all of this, if you didn’t know before, you certainly know now that operating a business within the cannabis industry requires significant attention to detail, as well as accurate and correct documentation. 

One of your most important jobs as a business owner is to meet any and all compliance regulations. Keeping track of every expense you have, such as cultivation, administration, marketing, and sales, need to be documented continually. 

Keeping your records organized and up to date plays a huge role when you’re audited each year (or more) by the IRS. Just like your personal expenses, you’ll be at risk for fines if you’re unable to provide accurate information on how you’ve identified your business deductions. 

 

Voice Your Opinions

Just like any other business owner in America, you have the right to voice your opinion and advocate for change and growth within the cannabis industry. One of the best ways to evolve the cannabis banking industry is by coming together within your community and even gain support from non-cannabis community members. 

The cannabis industry has come a long way, and it’s certainly something to be proud of! However, there’s still much work left to do in terms of changing harsh and unfair laws specifically applied to cannabis businesses.   

Even though it may seem insignificant, contacting members of Congress about changing some of these laws is a great way to get the ball rolling. The more that small businesses take a stance on these tax codes, the more support we’ll start seeing from the federal government. 

 

 

Even though the 280E tax code is a significant hurdle that all cannabis businesses have to acknowledge and abide by, there are certainly ways this code can be less severe for your business. With the right team of qualified experts, employees, and documentation, your business has the potential to achieve and surpass all of its business goals. 

Cannabis Employees & Hiring: Free Webinar from Greenleaf HR

At Greenleaf HR, we’re passionate and dedicated to taking your business to the next level by providing you with the resources and tools you need to comply with all federal regulations within the cannabis industry. Our team of experts strives to provide you with the knowledge and answers of your most critical struggles, so your business can become strong and profitable. If you’d like to learn more about the 280E tax code, or any of the services we provide, reach out to us here. Let us help you take your company forward, faster.

McKenzie Swisshelm

McKenzie Swisshelm is the Marketing Manager for Greenleaf HR and Worklogic HR. She produces effective content like a fifth-year wizard but with a knack for strategic marketing, crafting digital strategy and, of course, Charms. In more wanky marketing muggle jargon, her specialties include setting metrics and reporting systems and then refining all of the above to impact an organization’s core business objectives and drive top line growth.

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