What is 280E

I’ve written a book about 280E and given hundreds of consults on 280E and its affect on cannabis business; however, I’m shocked about how many people in this business or getting into this industry still aren’t aware of the impacts of 280E. Here’s a quick refresh on 280E and getting your business set up for success.

IRC 280E is an IRS statute enacted in the 1980’s when a drug trafficker filed his taxes and claimed business deductions for some non-business things (this is a cliff notes version). The IRS got wind of this, and enacted IRC 280E to disallow for this. 280E Defined:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

 

280E Tax Rulings

All the tax credits and breaks that corporations get are disallowed for cannabis business until marijuana is descheduled or re-scheduled to III or IV of the Controlled Substance Act. If you can imagine, 280E is a draconian law that was implemented prior to the cannabis revolution in 1996. Since the enactment of IRC 280E, there have been two major court cases that have set tax precedent for cannabis businesses. These are the CHAMP (Californians Helping to Alleviate Medical Problems)  case and Martin vs. Commissioner. The outcome of those cases are very fascinating (check out the links below to read more). The main take-away from these cases: If you are schedule I or II you can take a cost of goods sold deduction. 

 

280E Impact on your Business

Do you make edibles? What about cannabis tinctures? CBD? If you are selling cannabis or marijuana in any form – 280E affects you. I refer to the cannabis sectors as sectors within the supply chain. If you are growing/producing you are at the beginning of the supply chain versus dispensing and retail would be at the end of the supply chain. The 280E burden is harsher the farther your cannabis business is down the supply chain. But this makes sense, if you are growing – the majority of your costs are related to inventory – nutrients, water, greenhouses, etc. You have minimal selling or marketing costs. Compared to a business that is selling to the public, the majority of their costs are general and administrative, selling, etc.

So how do I reduce the 280E Burden on my business?

We wouldn’t be here today, if advocates hadn’t pushed for marijuana reform. I was just in DC with NCIA, lobbying for 280E and banking reform.

  1. Send a letter out to your senator and representative asking them to reform 280E. (Send me an email if you want more info on this).
  2. Create a set of pro-forma financials and meet with a lawyer and CPA that can help you plan for 280E.
  3. Earmark for 280E. The burden of 280E is significant and ensure that you are earmarking your monies accordingly.

280E is draconian and is a weapon to hinder cannabis business. Please spread the word about 280E and get involved to make a difference.