280E for growers; is that a thing?
Yes, cannabis producers, including growers or cultivators, have to deal with 280E.
But what’s all involved?
In this post, we discuss 280E for growers, the deductions, and some frequently asked questions.
Looking for a reliable CPA firm to ensure you have the most deductions possible? Northstar is here to help!
Contact us now to learn more about how we’ll handle your operation’s finances as you scale.
Does 280E Apply to Growers?
Yes, 280E applies to growers. The IRS has released specific guidance on how 280E applies to cannabis businesses.
The key part of 280E that applies to growers is that cannabis is a ” Schedule I drug.” This means it’s considered a controlled substance and is in the same category as heroin, LSD, cocaine, and ecstasy.
As a result, growers can only deduct expenses related to producing or selling cannabis. They can’t deduct any other business expenses, such as rent, payroll, or advertising.
Most taxpayers who are in business can expect to fill out form-8829, “Expenses for Business Use of Your Home.” However, this form does not apply to cannabis businesses.
The 280E disallowance rule applies if you receive income from selling Schedule I or II drugs. And even though medical marijuana is considered legal by the state, cannabis has not been removed from Schedule I of the Controlled Substances Act.
Who Should Perform a 280E Analysis for Growers?
The IRS requires growers to file form-8670, “Donee Information Return.” This is a tax return that must be filed every time you donate an item to a non-profit organization.
So, if you donate any equipment to a non-profit organization (we’ll refer to them as “NPOs” for simplicity), then you need to fill out this form.
One of the pieces of information that must be included on this form is whether or not the NPO is allowed to receive tax-deductible donations.
You must get a written statement from the NPO that specifically states they are allowed to provide tax-deductible receipts. If they cannot provide you with this statement, then you should not claim deductions on your taxes for donating equipment to them.
But to bypass these challenges, it’s best to have a CPA perform a 280E analysis. Through this analysis, you’ll have a better understanding of what to expect come tax season and have a better idea of the deductions within reach.
280E Deductions for Growers
280E deductions for growers aren’t so clean-cut. They take some finesse to apply deductions properly.
Growers can only deduct expenses related to producing or selling cannabis. This includes costs for growing the plants, harvesting the crop, processing the cannabis, and packaging the product.
It also includes any costs associated with transporting the cannabis to retailers or dispensaries.
But it doesn’t include any other expenses, such as rent, payroll, or advertising.
These deductions can be tricky to claim, as you’ll need to have detailed records of your expenses. So it’s best to have a CPA help you with this process.
FAQs About 280E for Growers
Here are some common questions Northstar CPAs get about 280E and how it applies to growers:
What is deductible under 280E?
Growers can deduct expenses related to producing or selling cannabis under 280E. This includes costs for growing the plants, harvesting the crop, processing the cannabis, and packaging the product.
The key here is that all deductions must be related to COGS (cost of goods sold) for federal taxations.
It also includes any costs incurred while transporting the cannabis to other businesses, like retail operations and dispensaries.
What is not deductible for cannabis cultivators?
Growers cannot deduct rent, payroll, advertising, equipment taxes, inventory expenses, or depreciation. In essence, if you’re engaging in the trafficking of cannabis, you cannot deduct non-COGS-related deductions or credits for federal taxation.
What is IRC 280E?
IRC 280E is the Internal Revenue Code section that denies deductions to those trafficking in controlled substances, which includes growers.
Thus, if you’re a cannabis cultivator looking to deduct expenses, you’ll need to have a crafty CPA on hand and ready to structure your operation to obtain as many deductibles as possible.
What does IRC 280E mean for cannabis businesses?
Cannabis businesses cannot deduct any expenses, including those related to producing and selling cannabis (i.e., cultivation and transport expenses).
So, if a grower wanted to deduct the cost of growing the crop, for example, they would need to structure their business operations in such a way that is compliant with IRC 280E.
Concluding on 280E for Growers
As you can see, IRC 280E is a sticky situation for growers and cannabis cultivators. It hinders their ability to deduct expenses and makes them rely on more creative workarounds.
But by consulting with a CPA, growers can obtain deductions they wouldn’t be able to obtain on their own.
Want to learn how Northstar’s CPAs can help your cannabis cultivation operation deduct the most? Get in touch now to discuss strategies for paying less tax and maximizing your profits!