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 is 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 cannot 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?
A qualified CPA with cannabis industry experience should perform your 280E analysis. Through this analysis, you will have a better understanding of what to expect during tax season and a clearer picture of the deductions within reach.
If you donate equipment to a non-profit organization, you may also need to file form-8670 (Donee Information Return). You must get a written statement from the non-profit confirming they are allowed to provide tax-deductible receipts. If they cannot provide this statement, do not claim deductions on your taxes for donating equipment to them.
280E Deductions for Growers
280E deductions for growers are not straightforward. They take finesse to apply 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 does not include any other expenses, such as rent, payroll, or advertising.
These deductions can be tricky to claim, as you will need detailed records of your expenses. Working with a CPA who specializes in cannabis accounting is the best approach.
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 taxation.
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 are engaged in the sale 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 cannabis growers.
If you are a cannabis cultivator looking to deduct expenses, you will need a knowledgeable CPA who can structure your operation to capture as many allowable deductions as possible.
What does IRC 280E mean for cannabis businesses?
Cannabis businesses cannot deduct most expenses at the federal level. The only offset to gross income is cost of goods sold (COGS).
If a grower wants to deduct the cost of growing the crop, they need to structure their business operations in a way that is compliant with IRC 280E and properly classifies production costs as COGS.
Concluding on 280E for Growers
IRC 280E creates a challenging tax situation for growers and cannabis cultivators. It limits their ability to deduct expenses and requires careful planning and structuring.
But by consulting with a CPA, growers can capture deductions they would not be able to identify on their own. Professional guidance is especially valuable when it comes to properly classifying costs as COGS and preparing documentation that holds up under IRS scrutiny.