It’s everybody’s favorite time of year again – tax time! Cue eye roll. Taxes are pretty much the bane of every business owner’s existence. But cannabis retailers carry a tax burden that is significantly more substantial than traditional retail businesses.The reason? Internal Revenue Code Section 280E.
What Is Section 280E and How Does It Affect Cannabis Retailers?
If you’ve been in the cannabis industry for a while, you’ve probably heard of Section 280E. But what exactly is it – and more importantly, how exactly does it affect you as a cannabis retailer?
Section 280E of the IRS’ code prohibits businesses associated with trafficking Schedule I or II substances from deducting normal business expenses from their taxable income. Since cannabis is still listed as a Schedule I substance at the federal level, this means that legitimate, state-approved, legally-licensed cannabis businesses are subject to 280E.
As a cannabis retailer, 280E means that you will only be allowed to deduct the Cost of Goods Sold (COGS) from your gross income for tax purposes. In other words, you will NOT be able to deduct other normal business expenses like:
- Employee payroll and benefits
- Cost of rent and utilities
- Marketing and advertising expenses
- Facility repair and maintenance
The bottom line? Cannabis retailers – and other cannabis business owners – get taxed at a significantly steeper rate.
How Can I Reduce My Tax Burden?
As a cannabis retailer, the IRS will only consider your inventory as COGS. However, there are legal ways of separating other business expenses from the retail side so that you avoid paying taxes on them.
The easiest way to do this is to form a separate company that operates under the same roof as your retail business. This is legal under the IRS’ multiple business rule.
For example, if you run a medical marijuana dispensary, you could form a separate business to handle patient advocacy, education, or counseling. Or, if you’re a recreational cannabis retailer, your second business could sell paraphernalia, apparel, or any other non-cannabis products (as long as those products are legally allowed to be sold in the same establishment as recreational cannabis – check your local laws).
By establishing a second business that operates in the same facility as your cannabis retail operation, you can separate expenses accordingly. All expenses that are captured under the secondary business – including employee wages and benefits – will now be legally deductible from your gross income.
Of course, you should consult with a tax attorney or CPA who is familiar with 280E and its impact on the legal cannabis industry. And if you do form a separate legal entity to operate within your retail facility, make sure you do so legitimately and in accordance with all requisite laws and procedures.
Lastly, it’s imperative that you keep meticulous financial records and track everything closely, particularly employee hours and tasks if they are being split between the two businesses.
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