IRS 280E Explained
IRS 280E is a rule that prohibits businesses from deducting their expenses if they are 'trafficking in controlled substances.' This includes cannabis, as it is still considered a Schedule I drug by the DEA.
The reason behind this rule is to prevent drug dealers from using the tax code to their advantage. By disallowing these deductions, the idea is that this tax code makes it harder for drug dealers to make a profit.
In order to qualify for 280E, a business must be involved in the 'sale, distribution, or dispensing' of Schedule I or II drugs. Cannabis currently falls under this category.
However, there is an important distinction to make between growers and dispensaries when it comes to how 280E applies.
How to Avoid 280E
Avoiding 280E involves setting up your business in a way that doesn't involve the 'sale, distribution, or dispensing' of cannabis. This isn't always a viable option, particularly for those who work directly with cannabis products.
However, it's possible to lessen your tax liabilities while adhering to 280E regulatory requirements. The majority of cannabis companies don't know about the exceptions. But understanding 280E, what to do, what you're looking for, and having the Northstar team's guidance can save you money on your IRS tax return.
What is a 280E Chart of Accounts?
A 280E chart of accounts is a specialized accounting system that tracks the expenses of a cannabis business in a way that complies with IRS regulations.
This type of accounting is necessary because cannabis operations are not able to deduct their business expenses like other businesses. This means that they have to track their expenses in a very specific way in order to stay compliant with 280E.
A 280E chart of accounts typically includes categories for things like advertising, payroll, and rent. It is important to work with a qualified accountant when setting up this type of system.
Who does 280E apply to?
280E applies to any business that 'traffics in controlled substances.' This includes cannabis, as it is still considered a Schedule I drug by the DEA. However, this may soon change.
What can be deducted under 280E?
Deductions under 280E can include the costs of producing and selling cannabis. However, other business expenses, such as advertising, payroll, and rent, cannot be deducted.
Does 280E apply to hemp?
280E only applies to Schedule I and II drugs, which currently include cannabis. However, hemp was recently removed from the DEA's list of Schedule I drugs. This means that 280E may not apply to hemp in the future.
What is Section 280E of the Revenue Code and how it affects businesses?
Section 280E of the Revenue Code is a rule that prohibits businesses from deducting traditional business expenses if they are 'trafficking in controlled substances.' This includes cannabis for the time being.
What expenses can a dispensary deduct?
Dispensaries can deduct the costs of producing and selling cannabis. However, they cannot deduct other business expenses, such as advertising, payroll, and rent. The cost of goods sold (COGS) is deductible, which includes the costs and expenses that are directly connected to producing goods.