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Posted by Dennis Jao

IRS Guidelines for the Cannabis Industry

IRS Guidelines for the Cannabis Industry

Marijuana is legal in the United States for recreational or medical use except in four states. The country has awarded more than 35,329 licenses for adult or medical use, and the industry is predicted to reach about $30 billion annually by 2025. Although the industry is legal, trafficking marijuana is still a federal crime. 

The law forbids the manufacturing, distribution, or dispensing of marijuana because it is considered a Schedule I substance. These substances under the CSA are drugs that quickly become addictive, are unacceptable, and lack safety under medical supervision. The sale of cannabis violates federal law, although it is legal to grow in many states. Thus, the law has enacted Code 280E to supervise anything concerning the cannabis industry.

Is Cannabis Income Federally Taxable?

Although the substance is still illegal under federal law, income from the industry is taxable regardless of the legality. Thus, income from cannabis business or cannabis-related products is taxable under federal law as updated by the IRS on their new webpage. The update is a mandate from the federal court stating that all income made from state-compliant or non-compliant, or illegal cannabis businesses is taxable under federal income tax.

Meaning of IRS Code 280E

The IRS code 280E summarizes the guidelines for participating in the cannabis industry as follows:

  • The code deters dealers from deducting taxes as part of business expenses.

  • The code includes all legitimate cannabis owners.

  • The code increases taxable income based on deductions.

  • In addition, cannabis businesses attract higher federal; tax rates – 40 percent to 80 percent and 21 percent corporate tax.

It is pretty obvious that the cannabis industry is swimming with profits, but the enacted code has limited the efforts of cannabis owners. The code reduces the privilege of investing in infrastructure, benefits, pay raises, charity, operation expansions, and many other things because of the high tax rates and limited licenses. 

Types of 280E Cost of Goods Sold (COGS)

The code requires adequate knowledge to compile and perform the right deductions. Thus, here is a list of deductible labor under code 280E COGS to work:

  • Cleaning

  • Trimming

  • Curing

  • Packaging

  • Inventory

In addition, cannabis planters may take additional deductions for:

  • Supplies (seeds, and fertilizers) and raw materials 

  • Product costs (indirect) of maintenance of equipment for cannabis farming, ages for supervision, and costs of inspection and quality control.

For a dispensary, COGS affects production and merchandise costs, such as the transportation cost of buying cannabis wholesales. Cannabis wannabes can also be entitled to deductions on electric bills. Besides those, every aspect of the business is subject to IRS code 280E scrutiny. 

Deductible Expenses on 280E

It is complicated to identify whether deductions are part of the Cost of Goods Sold (COGS) to reduce the effect of tax on cannabis businesses significantly. In summary, growing and selling cannabis products wholesale, whether as cultivators, producers, extractors, or infused cannabis, is subject to 280E. The entire industry under cultivation or extraction procedures in a direct operation is considered COGS. However, you cannot deduct transportation and delivery costs on COGS.

Cannabis Verticals Affected by 280E

IRS Code 280E is directed at the selling and trafficking of cannabis products but has a higher impact on cannabis retail operations. However, it will do you good to understand the entire concept of code and the overall structure of the business. The knowledge will help you know the company and the impact of federal laws. Cannabis verticals fall under different categories, such as:

  • Cultivation / Grow

  • Processing / Infusions / Extractions

  • Retail Dispensary

  • Vertically Integrated: These people obtained full licenses in every part of the business, from growing to producing and selling cannabis-related products. 

However, selling cannabis products wholesale to other retailers or vendors is considered trafficking and punishable under IRS Code 280E. To get proper deductions, you must know the difference between verticals and seed-to-sale functions in the cannabis business.



Dennis Jao
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