The Green Rush sweeping the nation: reduce your tax burden in the cannabis business

cannabis business

As Americans’ support for legalizing marijuana continues to rise, more and more businesses are now legitimately growing and selling it. However, it would be naive to think that all cannabis entrepreneurs are swimming in pools of profits.

What many do not know, is that they’re being taxed at insanely high rates – all thanks to a crazy little thing called the IRS Code Section 280E.

As the wave of cannabis legalization continues to sweep across the nation, more legal controversies have arisen and are threatening marijuana sales.

So how can you stay afloat and minimize tax expenses for your cannabis business?

Let’s sit down and take a closer look!


What is Section 280E and how does it affect Cannabis Businesses?

Probably the biggest challenge for the marijuana industry these days is that, despite all the liberalization rhetoric, the federal government still sees cannabis as a dangerous substance (a Schedule 1 drug substance).

Not only are licensed cannabis businesses taxed at a much higher (up to 90%) effective tax rate compared to other businesses; the federal statute called Section 280E of the IRS tax code restricts cannabis-related entrepreneurs from being able to reduce their tax liability through tax deductions and/or credits.

In fact, the only way you can avoid falling under Section 280E is by carefully structuring your business properly.


280E and its pitfalls: Maximize your deductions

The 280E tax code may seem unfair and repressive. Still, there are ways to avoid being overtaxed and protect yourself from litigation:

  • Set up an S-corporation or LLC

By registering as a corporation, you’ll be able to run two businesses separately. One part will be dedicated to the production and distribution of cannabis, while the second part will comprise of all the unrestricted (property, branding or service related) activities. This allows you to file separate tax returns and claim the common deductions when filling out the ‘legal’ (unrelated to cannabis) return.

It’s still important, however, that you consult with your local tax professional before choosing the right legal structure for operating your business.

  • Itemize expenses

The IRS may impose a 20% fine for inaccurate identification of your deductions. That’s why it’s important to document every expense connected with your business development, including expenses on production, administration and marketing. So use the right document management solution in order to keep your business records up-to-date.


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  • Categorize employee positions

Separate tares from wheat, and bartenders from cultivators. Track each employee occupation in order to avoid penalties when being audited by the IRS and clarify which wages are deductible and which are not.

  • Consult with industry experts

Find an industry tax expert who knows the law inside-out and ask for advice. With the proper legal support, you’ll be able to separate cannabis activities from federally legal activities, claim some federal deductions and minimize the impact of 280E.


What to expect in 2019

Many industry experts expect cannabis to be excluded from the list of Schedule 1 substances in 2019, which means it can be approved, regulated, cultivated and prescribed like any other medicine.

Reforming Section 280E has been a slow and painful process. There most certainly be a huge sigh of relief for both businesses, customers and the federal government itself – once it is fully legalized. After all, legalizing pot could bring millions in annual tax revenue to both the state and federal government.

To sum it all up, taxes may seem like the least important thing to care about, especially when your business is growing rapidly. Yet, without giving it the proper attention, you’re likely to end up losing staggering amounts of money.

You can always find the newest template for any necessary IRS tax form and fill it out online HERE.