What is the IRS 280E Tax Code and why is it killing the marijuana industry right now?
The cannabis industry in the United States is gradually becoming a multi-billion dollar corporate sector. It is not uncommon for the regulations not to have been adapted to this industry as they are fairly new. It’s also a recently legalized industry.
However, there is a cumbersome problem that bothers every cannabis entrepreneur in the country, regardless of the laws of their state. This issue revolves around Section 280E, Tax Codes.
This tax law has made it very difficult for people who have no idea how to find their way around to run a canna business.
The IRS claims that all federal canna companies are illegitimate, although some states have legitimized it. As a result, these companies are unable to deduct most of the costs incurred when filing their taxes, with the exception of the cost of the products sold.
To make matters worse, several financial institutions have refused to do business with entrepreneurs in the industry, regardless of their area of expertise.
Cannabis entrepreneurs pay excessive tax rates almost four times higher than other companies. Thanks to the tax code 280E, normal deductible costs cannot be deducted. For example, costs associated with paying rent, wages, buying machinery, and even accounting cannot be excluded. Only those related to primary cannabis cultivation can be deducted.
Some states have issued steps that can be taken to reduce the tax burden on the cannabis business and keep it operational and profitable.
It cannot be denied that cannabis is still a Schedule 1 controlled substance, even though it is legalized in several states and used medicinally in the country. However, there is speculation that the tax code 280E is the federal government’s strategy to be at the forefront of the cannabis industry.
The tax code 280E states that “drug dealers cannot write off business expenses from illegal activities, in particular from the substances listed in Appendix I and Appendix II”. It was enshrined in law in 1982.
Because of this, many legally operating cannabis companies have suffered from being unable to write off the expenses that should normally be written off. To back this up, the entire cannabis business had total sales of less than $ 13 billion in 2017 alone, and the federal government raised around $ 4.7 billion in taxes. If that doesn’t prove that the Tax Code is impartial, nothing else would.
Oddly enough, the medical cannabis business is still illegal and has to pay these exorbitant taxes. This is because the source of total income is considered illegal by the IRS.
Simply put, any marijuana plant business is illegal under federal law.
Fortunately, Section 280E isn’t as solid as everyone has assumed.
That loophole is in the exclusion known as the “cost of goods sold”.
This exclusion includes costs incurred in connection with growing the plant buds.
Some of the deductible costs include:
Raw material: This includes the supplies needed for cultivation. E.g. fertilizer, seeds, plant clones, etc.
Job: This includes labor used during preplanting, planting and harvesting the plants. They were used to clean, trim, and even package the product for sale.
Transport: This includes the cost of transporting the purchased seeds to the farm and the shipping costs of transporting the marijuana to the point of sale.
Other direct costs: E.g. electricity, maintenance costs of the machines and devices used, etc.
Pharmacies, on the other hand, can only exempt the cost of the product and the cost of getting it to the store from the tax.
The ways in which you can navigate in your favor with the dreaded tax code 280E can be found below.
This is the first step to successfully resisting a phantom income. Proper documentation of all measures taken in the course of business is required.
Detailed and secured records help a company to prove its numerical claims. Also, a cannabis company needs to have more than one finance employee to keep track of the ever-growing data.
All costs incurred must be documented in detail with an authentic paper path. This would better prepare the facility for an unexpected IRS audit.
Invest in the right software
There is unique software that can be used to retrieve tax and audit information at any time. In addition, the information is easily accessible and easy to read.
The presence of software saves you from various human errors. It is well known that calculating and documenting tax data can be tedious. If you leave this to an employee without using the software, it can lead to a lot of errors in the data.
With the right software, all tax documents can be carefully arranged and recorded.
Accurately classify the employee details
When employees are properly categorized, their wages will be properly documented. Penalties can be avoided and money can be saved.
The business owners could determine the wages of the workers, which are waived under tax 280E.
Get an idea of all the taxes you have to pay
As a business owner in the cannabis industry, taxes must be regulated at the federal, state, and local levels. But first, an idea of the surcharges is required.
When that’s done, you can get an idea and start the application process to properly maintain your tax reports.
Join the Cannabis Corporation
This will help both growers and retailers to maintain proper business relationships with all levels of the business chain.
In that way, the group would be a powerful force in overcoming the stringent regulations put in place by the federal government and the IRS.
There would be support as the community got stronger. l and advocates better politics.
After all, you should be transparent in all of your sales. Base your prices on the tax differentials related to your state policies.
Some cannabis companies go the long way by providing tax details on receipts.
As we continue to see the industry expanding and thriving financially, the thought remains that if tax code 280E could be changed, it could be even bigger and better. Unfortunately, there is no indication that these long-awaited change guidelines will be released anytime soon.
So try your best to work around this problem safely.
If it seems difficult to work with, there are seasoned consultants who are knowledgeable about Tax 280E for cannabis entrepreneurs.
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