In simple terms, cannabis businesses are only allowed to deduct expenses that are part of the “costs of goods sold.” Though one could argue that cannabis deliveries have a cost to selling their goods (i.e. purchasing delivery vehicles or building an eCommerce shop), neither of those expenses are tax-deductible. It’s weird, we know. The following is a list of items that are considered costs of goods sold under IRS Regulation 1.47-11(c) IMPLICATIONS •Ongoing maintenance of machinery and equipment •Labor costs and employee benefits •Insurance costs •Supplies •Utility costs •Property and sales tax
It seems that most of the costs of goods sold are taken on by cultivators. So where exactly does that leave retailers? The following is a list of expenses that are not tax-deductible. •Marketing and sales expenses •Advertising •State income taxes •General administrative costs not directly tied to the production of goods •Transportation from the company
1. Isolate any cannabis activities to one company. Have the owners of the company set up an affiliate that does not touch any cannabis product. Most importanly, have that business provide property and services needed by your cannabis business at a reasonable markup. List of possible services: 1. Renting and repair of machinery/equipment 2. Renting facilities 3. Insurance 4. Utilities 5. Furnishing materials 2. Have a separate entity handle any non-cannabis related activities/sales as to not consider their activities as “trafficking” of any schedule 1 substance. 3. Establish an LLC. Owners can deduct 20% of their income under section 199A.
OVERCOMING 280E These three options are merely band-aid solutions that aim to fix a larger problem: the tax code itself. Pushing for legislative change is the correct way to go about lowering tax rates. These options may temporarily allow you to cut your losses but always confirm with a CPA and legal counsel before taking any action.