If you’re in today’s legal cannabis industry you’re aware that tax code 280E restricts you from operating like a traditional business. Simply put, even though you are operating a state-legal business, cannabis is still considered illegal federally. At the end of the day, this changes which expenses you are allowed to deduct for tax purposes.
So what does that really mean and how can you keep your business safe? Let’s look at some key points.
Typically, a business would be able to deduct almost all business expenses for tax purposes. This includes Cost of Good Sold (COGS), plus non-COGS expenses such as office rent, wages for administrative staff and wages for sales staff that are not involved in production. However, Section 280E stipulates that for businesses involved in Schedule I or II substances, no business expenses can be deducted for tax purposes. This effectively taxes those businesses on their gross revenue, instead of their profit.
However, in January 2015, the IRS issued a memo stating that state-legal cannabis businesses can deduct COGS expenses for tax purposes, and gave some guidance as to which expenses can or cannot be capitalized into inventory cost and therefore included in COGS. Deductible items include wages, rent and repair expenses related to production. However, you are not allowed to deduct any of these items if they are related to general business or marketing activities.
Knowing which expenses can be included in COGS and therefore can be deducted can be confusing. If you break it into two camps – deductions for resellers and deductions for growers – it becomes a bit more manageable.
- Resellers can claim deductions for the invoice price for cannabis, electric bills for designated inventory areas and the cost of travel to purchase, transport and ship cannabis.
- Growers can deduct raw materials and supplies (e.g. seeds, soil, clones and fertilizer), direct labor before the sale and indirect production cots.
The 280E tax law is tricky and can make or break your business. The good news? There are ways to avoid pitfalls. Some quick things you should do to ensure you are compliant:
- Document and Itemize Everything. Every expense you have from production to general business and marketing operations needs to be documented. When (not if) you get audited, the IRS will need to see documentation that shows how you came up with your COGS. If you can’t prove how you came up with your deductions, you stand the risk of being penalized with a 20 percent fine for an inaccurate tax return.
- Categorize Positions. The IRS will be evaluating the wages you pay to who when they work in each part of your business. These numbers must be categorized correctly and mirror what you’ve reported on your tax return. For example, if you have an employee that works part-time in retail sales and the other time in the production area – you need to clearly record and accurately track that time.
- Revisit Your Shipping Strategy. Since you’re allowed to deduct the cost of goods sold, you can also deduct your shipping costs if you structure it right. The way to do this is for your dispensaries to assume the shipping costs and risk of loss. In essence the retailer buyer pays for the shipping costs. Doing this allows you to deduct it as a COGS.
- Consult with Experts. To ensure you’re compliant, you should partner with experts who know the tax law inside and out. There are a number of individual tax attorneys who specialize in cannabis tax law. You can also align your company with an organization like Wurk that provides Payroll and HR technology that is designed specifically for the cannabis industry. In addition to automating all the tedious processes from HR compliance to scheduling and payroll, Wurk ensures you are aligned with an ecosystem of experts who know how to guide you so you’re ready when the IRS audit comes.
While the 280E tax code can be intimidating, if you adhere to all these tips you will be positioned for success.
Learn more about how Wurk can help alleviate your compliance stressors and help you avoid 280E pitfalls by contacting Wurk at email@example.com.
Wurk is a Payroll and HR platform specifically designed for the highly regulated cannabis industry. Our platform automates the processes associated with hiring, managing and paying employees, greatly reducing costs for employers, and making administrative tasks easier, less error-prone and quicker for employees. The Wurk platform includes tools to manage compliance with industry-specific regulations like Federal income tax code section 280E and state-specific requirements for employee registration and badging. Wurk provides an ecosystem of industry experts specializing in 280E tax law, accounting, human resources, cannabis corporate law, and banking. Learn more www.enjoywurk.com