The Impact of Cannabis on a Business’ Tax Deductions
It’s critical any cannabis entrepreneur understands that the cannabusiness world is different from any other business. It’s not just the business model or supply chain, it’s the tight wiggle room from several laws and regulations on all sectors of business. Filing taxes on a cannabis business is certainly a part business owners must pay close attention to. According to Forbes, due to unchanged federal laws on marijuana and strict guidelines by the IRS, tax deduction laws are quite unique to the cannabis industry. It’s important business owners know and understand tax section 280E, as it directly applies to them.
Tax Section 280e
This tax section requires that cannabis businesses file federal taxes under this tax code. All Schedule I and II trafficked controlled substances are directed to, and according to the federal government, marijuana falls under this category as a Schedule 1. This includes the growing, buying, and selling of marijuana. Essentially, this tax code means cannabis businesses need to pay taxes on all of their revenue. Therefore, making them ineligible from using business expenses as tax deductions.
In its totality, section 280E states: “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 Cannabis Business Owners?
Simply put, business owners in the cannabis industry pay tax on their gross income. Since marijuana is a Schedule I substance, this section prohibits them from the tax deduction benefits of a typical business owner. State legalization hasn’t wavered the federal regulations of marijuana, thus putting cannabis businesses under extreme scrutiny by the IRS. Previous cannabusiness owners have faced harsh repercussions for disobeying the tax act and failing to efficiently fill taxes.
The punishments are costly, and the IRA is certainly paying attention to the financial workings of all cannabis businesses. To the business owners in this industry, you need to abide by section 280E and thoroughly understand your legal tax expectations to clear yourself and your business from an attack by the IRS.
There are a lot of hoops to jump through in the cannabis industry. Even business owners from the states with seven years of recreational legalization aren’t fully experts. Many mistakes have been made in industry due to the high regulations surrounding marijuana. For the vets and the newbies, pay close attention to the laws that surround your industry, they’re changing all the time. Through attention to the fluctuating laws on regulations, you can learn how to market and craft your business accordingly in this highly-censored industry.
For assistance on marketing your business, contact us at Herban Creative. We have all the marketing and digital experience necessary to grow your cannabusiness from the ground up.