Understanding 280e – Accounting Buds

Cannabis Accounting & the Dilemma with 280e

Cannabis has been a Schedule 1 controlled substance since the enactment of the Controlled Substances Act in 1970. The Controlled Substances Act defines cannabis as:

all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.

The tax code clearly and unequivocally states:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

What does this all mean for cannabis companies?

Due to its inclusion in the Controlled Substances Act, all plant touching businesses, including those that only touch seeds, are required to follow Section 280e of the tax code. This means that Cannabis companies are not allowed to take deductions or credits available to most businesses while calculating their taxes. For example, Cannabis businesses are not able to take deductions on items such as:

*Payroll/Labor

*Office Expenses

* Advertising

* Interest Expense

* Depreciation

* Research & Development

* Legal Fees

There is one exception to this, Cost of Goods Sold, as defined in Section 471 of the IRS code, is an allowable deduction. The calculation of Cost of Goods is very complex, and unless you understand how Section 471 works, have the knowledge and tools to do GAAP full absorption cost accounting, and can properly allocate expenses to Inventory and Cost of Goods Sold, trying to maximize your deductions to “beat” 280e is futile.

Whether cannabis is your only product, or one of many products you sell, having an accounting firm that understands 280e & 471 is the only way to ensure you are calculating your tax burden correctly, and keep your C-Suite executives on the right side of federal laws.