When it comes to running a legal cannabis business, there is perhaps no greater issue of concern than walking the tightrope of paying proper federal taxes for a substance that is federally illegal. Proper reporting and compliance are essential to making this new market viable and legitimate in the eyes of the public.
But taxes can be daunting even for a regular business person in an established industry. For cannabis, the regular rules do not apply. Primarily, this is due to a section of the federal tax code, Section 280E, which is the source of many migraines for entrepreneurs in the cannabis world.
The National Cannabis Industry Association (NCIA) is focusing much of their energy in Washington, DC, to exclude cannabis businesses from this provision. NCIA explains the issue like so:
“Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the ‘trafficking’ of Schedule I or II substances, as defined by the Controlled Substances Act. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance.
“A throwback from the Reagan Administration, Section 280E originated from a 1981 court case in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses. In 1982, Congress created 280E to prevent other drug dealers from following suit. It states that no deductions should be allowed on any amount ‘in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.’”
What does that mean for you? BE INFORMED AND GET INVOLVED! Those who survive in the brave new cannabis world will have to stay on top of evolving regulations and also maintain impeccable books. Advocates are working toward change at the national level, but how long change takes depends on the strength of the effort to affect policy. Just yesterday, Washington, DC lawmakers introduced several cannabis bills in both houses, including The Responsibly Addressing the Marijuana Policy Gap (RAMP) Act, which is being championed by two Oregonians, Representative Earl Blumenaur (D-OR) in the House, and Senator Tom Wyden (D-OR).
Navigating the IRS 280E limitations can be a daunting task; if not properly understood the risk of paying too much tax, or being audited, is high. Operating a parallel business to reclaim otherwise disallowed deductions is a tried and true way to handle the 280E limitations. Selecting the right Business Entity for your business is essential and by far the most effective way to mitigate your tax liability as well as keep your audit profile low.
Oregonians and other interested investors in Oregon’s cannabis future, will either sink or swim in the new marketplace. Ensure your spot in the future of the cannabis industry, and make certain to join the Oregon Marijuana Business Conference in Eugene this April 28th. Crucial topics will be covered, including “Taxes and Cannabis”, along with other indispensable components to a successful enterprise. Get your early bird tickets today!