280E Accountant

It is critical your accountant understands IRC Section 280E, as compliance is a critical concern for cannabis businesses due to the unique tax implications it presents. IRC Section 280E imposes strict tax rules for businesses involved in the production, distribution, or sale of controlled substances, including cannabis.

The Significance of 280E on the Cannabis Industry

Section 280E prohibits cannabis businesses from deducting most standard business expenses from their gross income. This includes expenses like rent, employee wages, advertising, utilities, and other ordinary and necessary costs that most businesses can deduct.

The only allowable deduction under 280E is for the Cost of Goods Sold (COGS), which refers to the direct costs of producing or acquiring the products sold by the business.

2. Cost of Goods Sold (COGS): COGS includes the direct costs associated with the cultivation, production, or procurement of cannabis products. This may involve raw materials (seeds, soil, fertilizers), labor directly tied to the production process, and other direct manufacturing or inventory-related costs. 

Many businesses have attempted to navigate around Section 280E by establishing complex management agreements and organizational structures, which often fail under audit scrutiny. At Leafy Accounting Group, we focus on complying with 280E rather than evading it. Our approach involves working within the legal framework to help you maximize your tax deductions legitimately. Our team of specialists conducts a thorough analysis of your business operations to uncover opportunities for cost savings.

Commonly asked questions

Generally, the answer is no; these wages are not deductible for federal tax purposes due to the stipulations outlined in Section 280E.
Cultivators are advised to conduct a thorough analysis of the expenses related to cultivation and packaging in order to optimize their inventory costs, thereby maximizing the deductions available for the cost of goods sold.
To optimize tax deductions in compliance with 280E, it is advisable for businesses to adopt the accrual basis of accounting.
It is logical to conclude that if the IRS were to review a tax return from a cannabis business that includes deductions apart from the cost of goods sold, it could potentially trigger an audit. The manner in which a tax return is presented is critically important; even if the net income reported is accurate, improper presentation may result in heightened scrutiny from the IRS.

Find a friendly and knowledgeable cannabis accountant who understands the specific requirements for your business to succeed.

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