Review the facts of Section 280E to reset your tax planning as needed and make sure your approach is sound.
In an unpredictable regulatory environment that is also ripe with opportunities, cannabis businesses have little room for mistakes. To avoid risks and remain sustainable, they must be in good standing with the IRS, including compliance with Internal Revenue Code (IRC) Section 280E.
Section 280E excludes typical business expense deductions from federal taxes for cannabis companies. Not only can this exclusion limit profits, but it also complicates cannabis companies’ approach to taxes. Understanding and managing Section 280E as part of tax planning is not impossible, however. Acknowledging these three facts is a good start.
1. Section 280E workarounds or loopholes do not generally exist
Without deductions and credits, some cannabis companies face an effective tax rate of up to 80%. It’s no wonder that business owners unwisely have sought ways to circumvent Section 280E. But too many have learned the hard way that aggressive and risky Section 280E strategies do not succeed.
Some companies have incurred penalties for incorrectly allocating expenses into cost of goods sold and improperly allocating costs to nonplant-touching lines of business. Many cannabis companies are currently in litigation, and ones that have pursued litigation have been regularly defeated by the government.