One of the benefits of owning and operating a registered business is the ability to deduct expenses. You can separate the earnings from your cost of doing business when tax season rolls around. That helps every business hold on to more of their hard-earned dollars. It is important to understand obligations and opportunities to save on cannabis business taxes.
The U.S. Internal Revenue Code (IRC) is the official tax rule that businesses have to follow. Any business owner who wants to see the full version of the Internal Revenue Code can find it on the Office of the Law Revision Counsel website.
The U.S. Treasury Department uses the Internal Revenue Code (IRC) to create regulations. That summary can be found in Title 26 of the Code for Federal Regulations (26 CFR). Businesses seek the advice of tax professionals because tax laws can be very complicated.
If you think regular business taxes are hard, try navigating as a cannabis-related business (CRB). Even while states have legalized medical cannabis, marijuana remains (in all forms) a federally prohibited substance. And that means business taxes for CRBs are very complicated. Because cannabis is still on the Schedule 1 list of prohibited substances. And that puts cannabis businesses at odds with the Federal tax code.
Some people are surprised to learn that state legalization does not impact federal tax codes. And while legalized by the state, there is no recognition for the legal rights of any business that is cannabis or plant-touching.
How do you know whether the 280E tax laws apply to your business? It comes down to how close you are to cannabis in your work processes. There are four categories of cannabis businesses that are defined as plant-touching:
This is the practice of horticultural husbandry to clone plants and encourage favorable qualities of specific cannabis strains. That can include creating new strains, improving THC or cannabidiol content, etc. Plant breeding also develops unique terpene profiles and flavonoid (flavor) combinations that medical and adult-use consumers love.
Typically plant breeding activities are conducted in a lab with a greenhouse attached. Isolated breeding chambers keep different strains of female cannabis plants from cross-pollinating. And sometimes deliberately mixing up different strains to experiment with potency, flavor, and psychoactive effects to create new hybrid strains.
If plant breeders are the “mad scientists” of cannabis, then the green thumbs talent award goes to the cultivators and harvesters. These are the ones who are responsible for nurturing seeds to weed. And making sure that the cannabis is produced using strict quality control.
Commercial cultivators have to keep up with high demand. They must grow the most popular strains of cannabis for their dispensaries (if vertically integrated). Or in some states, cultivators and harvesters can sell raw cannabis and hemp products to third-party manufacturers and dispensaries.
Whether the raw cannabis or hemp material came from the same company (or purchased through a supplier), processing and extraction is the next step. It is where different processes are used to extract cannabis oil for vapes, tinctures, and edibles. It is science (literally), and many who work in extraction are trained chemists.
Even processing cannabis flowers for sale requires a lot of work. First, the cannabis bud is inspected and graded. Then it is trimmed and stored for sale in airtight containers to preserve the flavonoid and terpene content (flavor and aroma).
Any business that sells and distributes cannabis or hemp products through a licensed dispensary is categorized as plant-touching. They are handling both processed cannabis products (vape, tincture oils, and edibles) and the sale of raw cannabis to qualified consumers.
Are you wondering about Delta-THC and CBD (cannabidiol) businesses that operate online? Hemp products were federally legalized by the 2018 Farm Act. That means for the purposes of taxation; the federal government excludes CBD product revenues from the same restrictions that cannabis companies face. But cannabis business taxes still apply to hemp and Delta-THC retailers.
Although Delta-THC is hemp-derived, it contains a psychoactive level of Tetrahydrocannabinol. The status of Delta-THC (or semi-synthetic cannabis) is clear at the federal level. If you are a Delta-THC business and hemp-derived product, you are entitled to standard tax deductions and expenses.
Delta-THC products were removed from the Controlled Substances list in 2018 when hemp was federally legalized. However, some states are moving to ban Delta-THC products. Even though by federal law, hemp-derived semisynthetic products are not controlled substances.
Ancillary businesses in the cannabis sector may not be plant-touching. That can include packaging manufacturers, who create commercial packaging that dispensaries or distributors use. It also includes service providers, such as payment processing companies (POB), accountants, marketing agencies, lawyers, and other business specialties.
Tax deductions for ancillary businesses that serve the cannabis industry are not impacted. And that is because an ancillary business will never touch cannabis as part of normal business activities. This is one of the reasons why running an ancillary business in the cannabis sector can be very profitable, with eligible expense deductions and other tax code benefits.
The origin of the Internal Revenue Service (IRS) 280E tax code is interesting and very surprising to some people. It started in 1975 with a man named Jeffrey Edmondson. That year, the Minneapolis-based self-employed individual claimed expenses on his tax return.
Mr. Edmonson sold prohibited substances, including Schedule I and II drugs. However, as a good citizen, he wanted to file his taxes and be forthcoming about his earnings. And subsequently claimed $105 300 in tax deductions against his earnings.
The expenses Jeffrey Edmonson claimed included food, packaging supplies, telephone costs, and purchase of equipment such as a scale. Edmonson also claimed two-thirds of his rent as a business-related expense since he operated from his apartment.
The Internal Revenue Service audited him. In 1981, Mr. Edmonson received the support of a Judge in the U.S. Tax Court. Edmonson received a refund based on most expenses for producing and distributing controlled substances as part of his business model. And the origins of cannabis business taxes stem back to this landmark case.
By 1982, the IRS had written and enacted a new tax code. The 280E prohibited any business that earns revenue from Schedule I or Schedule II controlled substances from claiming standard business exemptions and deductions. But it does require businesses to file and pay taxes on gross income (not net earnings).
And that model has presented a significant financial burden to licensed dispensaries and any plant-touching business entity.
The USA Patriot Act (2001) expanded the scope of transaction monitoring. This helps to alert the government about funds that may be used for terrorist activities. Money laundering is common among illicit and unlicensed cannabis producers and distributors. But state-licensed businesses must be compliant with cannabis business taxes.
To help improve awareness of large cash transactions, the U.S. Government requires that all cannabis producers report cash sales. Once the dispensary or cultivator/grower has received $10,000 or more in a single payment for cannabis goods, they must file a form and report those earnings.
Cash sales related to your trade or business require a Form 8300 to be filed. But only if the single transaction met or exceeded the $10,000 limit. Because whenever that kind of high-volume cash transaction occurs, Form 8300 is required.
An eligible transaction includes:
The Report of Cash Payments Over $10,000 Received in a Trade or Business (Form 8300) is available to download from the Internal Revenue Service website.
Accountabis specializes in tax preparation, bookkeeping, and accounting services for the cannabis sector. Simplify your bookkeeping while adhering to compliance by choosing our team to help your business grow.
Contact us today to schedule an appointment, or call (844) 276-2545.