I get asked all the time for advice and tips on how to start a marijuana business. Most of the time people want to bounce ideas off of me that involve growing and/or selling marijuana. Sometimes it will involve an ancillary industry idea, but for the most part the people that I talk to want to pursue a business idea that involves 'touching the plant' as a lot of people in the industry say these days. I offer up my two cents on what it would take to start a garden and/or a dispensary as best I can, and always tell people to take it for what they will considering I don't operate either type of business.
Something that I'm always quick to point out is the need for cannabis entrepreneurs to know about 280E and how it affects marijuana businesses during tax season. People dedicate a ton of time designing their garden, dialing in their 'grow recipe' to maximize their yields, but don't dedicate nearly as much time researching 280E. It's understandable - tax code is not a sexy thing. To most people, it's about the least desirable part of being in the industry. However, it's extremely important, which I'm sure a lot of people are learning for the first time as they prepare their taxes for their business.
Taxes can be confusing, especially when it comes to 280E. I am by no means a tax expert, but there are fortunately others out there that are. The National Cannabis Industry Association (NCIA) recently released a 280E white paper document that provides a ton of information about 280E. It answers frequently asked questions, such as basic ones like 'What Is Section 280E?' Below is an excerpt from the document describing what 280E is for those that aren't already in the know:
Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the "trafficking" of Schedule I or II substances, as defined by the Controlled Substances Act. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance.
A throwback from the Reagan Administration, Section 280E originated from a 1981 court case in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses. In 1982, Congress created 280E to prevent other drug dealers from following suit. It states that no deductions should be allowed on any amount "in carrying on any trade or business if such trade or business consists of trafficking in controlled substances."
With 23 states and the District of Columbia now allowing some form of legal marijuana, 280E is applied to state-regulated cannabis businesses more often than it is to the types of illegal drug dealers that the provision was intended to penalize.
Other topics covered in the document include:
How does Section 280E hurt state-legal cannabis businesses
How the 280E problem got worse in 2015
What types of business expenses are scrutinized under 280E
What deductions are now likely to be challenged
How did those deductions benefit cannabis businesses
What's the worst-case scenario for a business under 280E
How to help solve the 280E problem
The NCIA 280E guide even has examples of tax forms showing what is going to be scrutinized, and the end result to the business. It's an absolutely eye opening document, and one that every marijuana business owner should have. It's being offered completely free. Get your copy of the Section 280E NCIA white paper at this link here. Simply enter in your e-mail address and a copy of it will be e-mailed to you. Very easy. Marijuana business tax reform is a very serious issue. I guarantee there are people out there right now that didn't even have 280E on their radar prior to tax season, and are only now starting to understand just how much it hurts marijuana businesses.
The marijuana industry should be able to make the same deductions as other legal industries. Without 280E reform, the marijuana industry will never reach its full potential. Do your part. Step one is learning what 280E means to your business, and then once you have the knowledge, sharing it with others and urging your members of Congress to reform tax provisions for the marijuana industry, which is way overdue. Get your copy of the Section 280E NCIA white paper and encourage others to do the same. It could very well be the difference between your company succeeding in the marijuana industry, or being forced to fold.