Table of Contents
Anyone who doubts the cannabis industry’s growth needs to double-check the numbers.
Two years ago, experts valued the industry’s worth to be over $13 billion. Even though marijuana is still considered a controlled substance, thirty-five states plus the District of Columbia have legalized it for medical use.
It’s not surprising then that many want to be part of the industry. The good news is opening a dispensary isn’t the only way in. Plant-touching businesses are also on the rise, including cultivators or growers, breeders, extractors, etc.
Before you think growing cannabis is easy money, though, you need to know about 280E. Here, we’ll talk about the tax implications of the Internal Revenue Code (IRC) Section 280E for your cannabis cultivation business.
What Is 280E?
IRC 280E applies to all cannabis operators. It doesn’t matter if you’re in a state that allows marijuana for medical use. Growers, dispensaries, and so on must abide by the 280E tax code.
So what is it, anyway? It’s a law that prohibits business deductions in companies that buy or sell controlled substances. Keep in mind that under federal law, cannabis is a Schedule I controlled substance.
That means your cannabis-growing business wouldn’t be exempt from 280e. Of course, this makes it harder for cannabis entrepreneurs to run a profitable business, but there are ways around it.
Reducing Your Total Tax Liability
Under 280E tax laws, you can’t claim deductions for employee wages, technology, rent, etc.
However, it doesn’t mean nothing is deductible under IRC 280E. It’s best to hire a CPA or tax attorney to ensure you’re not claiming deductions that aren’t acceptable, just to be safe.
There are also exceptions if you operate your business in Colorado or Oregon, as these states exclude 280E in the calculation of state income tax. You could claim deductions on standard business expenses, but again, it would be best not to rely on DIY accounting and bookkeeping if you want sizable tax benefits.
Other Ways to Reduce Your Tax Burden
Before setting up your cultivation business, consider the structure that will make the most sense for you, tax-wise. For instance, business attorneys will often recommend a C-corporation setup.
That means owners (you and your business partners) will be taxed separately from the company. The advantage of this setup is your liability is limited. Even if the ownership changes, the C corp still exists, and you don’t have to take on debt in case the business runs into problems later on.
Besides choosing the proper structure for your cannabis-growing business, be sure to keep detailed labor time records. It’s not only good practice for making your company more audit-proof.
Having a paper trail could make certain activities, like designing a new cultivation facility, deductible. After all, deductions are allowed on an employee’s time (or at least a part of it).
Are You Planning to Become a Cannabis Entrepreneur?
Learning about 280E and how it applies to your cannabis business is only one of the many things you need to consider.
There are more topics you’ll have to peruse before you can say you’re ready for launch. It’s a good thing then that there are tons of information online that can help you.
You can start here. Check out our other cannabis industry-related posts for more tips and advice.