One of the biggest challenges facing cannabis businesses is the tax code. Specifically, the provision known as 280E has a significant impact on the financial performance of cannabis businesses. Here’s what you need to know about 280E and how it affects your cannabis business.

Section 280E of the Internal Revenue Code prohibits businesses from deducting expenses related to the “trafficking” of controlled substances. While this provision was originally intended to target illegal drug dealers, it has been applied to legal cannabis businesses, even those operating in states where cannabis is legal.

The expenses that are impacted by 280E are those that are related to the production, distribution, and sale of cannabis. This includes expenses such as rent, utilities, wages, and marketing costs. Unlike other businesses, cannabis businesses cannot deduct these expenses from their taxable income, resulting in a significantly higher tax burden.

The impact of 280E on cannabis businesses is significant. Without the ability to deduct expenses related to the production, distribution, and sale of cannabis, businesses are left with a higher tax burden. In some cases, the tax burden can be so high that it exceeds the profits of the business, making it difficult or impossible to operate.

While cannabis businesses cannot avoid the impact of 280E, there are strategies that can be used to mitigate its impact. One strategy is to focus on cost of goods sold (COGS), which are not subject to the same restrictions as other expenses. By maximizing COGS and minimizing other expenses, businesses can reduce their taxable income and lower their tax burden.

Another strategy is to consider structuring the business in a way that separates the production, distribution, and sale of cannabis. By creating separate entities for each stage of the process, it may be possible to deduct expenses related to each entity, reducing the overall tax burden.

Finally, it’s important for cannabis businesses to work with a specialized cannabis accounting firm that understands the unique challenges of the industry, including 280E. A cannabis accounting firm can provide guidance on tax planning and help businesses navigate the complex tax landscape.

In summary, 280E has a significant impact on the financial performance of cannabis businesses. While it cannot be avoided, there are strategies that can be used to mitigate its impact. By focusing on COGS, considering business structure, and working with a specialized cannabis accounting firm, businesses canreduce their tax burden and improve their financial performance.