Why Are 280E Tax Deductions Prohibited for Cannabis Businesses?

U.S. tax code is still catching up to the cannabis industry, and unfortunately, 280E tax deduction restrictions still apply to cannabis businesses. Learn why.

Cannabis represents an interesting legal situation. While 11 states and DC have legalized recreational cannabis so far, it still remains illegal at the federal level. This means that a number of barriers exist for cannabis businesses that don’t face other industries.

Chief among these hurdles include tax credits and deductions. Read on to see how cannabis businesses deal with the 280E tax during tax season.

How Are Cannabis Businesses Taxed? 

While cannabis remains illegal at a national level, cannabis businesses are still required to pay tax on their earnings. This is because the IRS does not see a difference between legal and illegal earnings. 

However, cannabis businesses operate under the 280E tax code, which means that they are not able to claim any tax credits for their work. This means all business expenses are borne by the company entirely. This means that things like employee salaries, utilities, and rent do not give you a break on your tax return. 


Are There Ways Around The 280E Tax?

In some cases, there are ways to claim credits on parts of a cannabis business. For instance, the Cost of Goods Sold deduction (or COGS) is a deduction that can cover expenses like water, fertilizer, or transit of non-cannabis products, which can reduce the amount you owe taxes on in April.

While far from the amount you’d be able to deduct if employee salaries were eligible, COGS can help reduce the pain of a huge tax bill. 

Of course, you need to make sure that you talk to a tax specialist who is familiar with COGS and the cannabis industry in general. Accidentally deducting expenses that are ineligible under the 280E tax code can lead to criminal charges. 

What About Deductions On State Taxes?

States taxes, obviously, differ from state to state, but if your state has legalized recreational cannabis, you can usually still claim deductions normally on your state tax return. For instance, this is now the case in California.  You should always check with your local regulations to make sure that you have a clear idea of what you can and cannot deduct.  

You should always keep track of employee’s paychecks through payroll software like www.thepaystubs.com since you’ll be able to deduct employee salaries at the state level. Of course, it’s also possible that once cannabis becomes legal on the federal level, the IRS may change its tune. While being able to claim retroactive deductions is unlikely, stranger things have happened. 

Running A Cannabis Business Is Hard

There’s no way around it: cannabis is a hard business to be in. It will stay that way for a while until the industry has grown and laws have changed enough so laws like the 280E tax are repealed. 

Fortunately, we’re here to make your job a little easier. For more information about the cannabis industry, check out the rest of our blog.