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How to Prepare for Tax Season in Light of 280E

Doing taxes isn’t fun, especially if you run a cannabis business. Here’s what our clients are doing to prepare for tax season in light of 280E.

If there is one thing that we all agree on, it’s the universal dislike of tax season. Doing taxes isn’t fun, especially if you run a cannabis business. Here’s what our clients are doing to prepare for tax season in light of 280E. 

Before we begin, you should know we’re not tax experts. You should definitely get professional advice before filing your taxes or relying on these tips. We hope this info gets you thinking and steers you in the right direction.

Get Familiar with 280E

As you probably already know, your cannabis business is treated differently than other mainstream businesses by the IRS. Cannabis businesses need to pay special attention to section 280E of the Internal Revenue Code. Deductions are especially important to keep an eye on. Essentially, cannabis businesses can not take many of the deductions that non-cannabis businesses are allowed to. 280E states that businesses that sell cannabis or other federally illegal controlled substances are not eligible to deduct expenses they incurred during the production, distribution, or sale process. Until cannabis is no longer considered a Schedule I drug under the Controlled Substances Act (fingers crossed!), all cannabis companies must abide by 280E even if they’re licensed and legal in their state. 

Identify Your Deductions

Because deductions can be a bit tricky under 280E, take your time to make sure you understand what deductions your cannabis business is eligible for. Consulting a tax professional who specializes in working with cannabis operators is a great idea, because they should have a firm grasp on what you can and cannot deduct.

For example, standalone cannabis retailers might only be able to deduct the cost of goods sold, such as:

  • Invoice price for cannabis, less trade or any other discounts
  • Electric bills for designated inventory areas 
  • Transportation needed to purchase cannabis
  • Legal shipping costs related to cannabis

This handy 280E Deductible COGS guide from WURK can help you learn more about what you may and may not be able to deduct. For more, here’s a helpful guide for dispensaries from our friends at FlowHub.

Anything not related to the cost of goods sold might not be deductible on a business tax return for cannabis businesses. This might include:

  • Rent
  • Payroll
  • Equipment
  • Equipment repairs
  • Inventory 
  • Storage
  • Interest
  • Display cases
  • Utilities
  • Insurance
  • Professional fees
  • Licenses and fees

You can see more examples of what you cannot deduct here

Plan Ahead

Leaving your taxes to the last minute can lead to unnecessary stress. Mark your calendars now and start to plan on getting your taxes done a bit early. That way if you hit a roadblock, you have time to get back on track. Not all taxes are due on April 15th, so make sure you’re aware of what dates apply to you. Here are a few examples of how these dates can vary. 

  • Sole proprietors: April 15th
  • Multiple-member LLC taxed as a partnership: usually March 15th
  • Corporations: December 31st

If you do end up needing more time to file your taxes, you can request an extension that can buy you up to six months of time to file your business tax return. This doesn’t mean you are off the hook until your new filing date. You’ll still need to provide the IRS and your state with an estimated payment of the taxes you believe you owe. 

Get Help

Of course, when you file your business taxes you want to make sure you’re doing everything correctly. This is extra important for those running cannabis businesses, as some reports have found that 10% to 15% of cannabis businesses get audited. That’s why it’s very important to hire a tax professional who specializes in working with cannabis businesses. Not only can they help make sure you’re maximizing your deductions by the book, but they can give you some much needed peace of mind that an accidental mistake won’t come back to bite you if you are audited. 

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