The Ultimate Guide to 280E Compliance for Cannabis Business Owners

If you’re a cannabis business owner, chances are the 280E tax code fills you with dread.

A thorn in the side of every cannabusiness, IRS Tax Section 280E is the federal tax code that states that any business engaged in the trafficking of a Schedule I or II controlled substance is barred from taking tax deductions for business expenses that a typical business can. 

Cannabis is classified as a Schedule I substance, making tax deductions for your business limited and complicated. Luckily, there are ways you can maximize your cost of goods sold deductions while ensuring you are complying with the tax code. If you’re ready to take the intimidation out of tax time and learn how your business can have higher-level accounting, check out these tips for 280E compliance.

Organize Your Business Structure

One way to maximize your deductions is to properly organize your business structure. With the help of an accounting professional, many cannabis business owners organize the structure into two or more businesses. One business may handle the production and distribution of cannabis. Another might handle care, selling of cannabis-related products, and there may be a management company as well. The idea is to have any functions that do not involve the sale of product in an entity that is not subject to IRC 280E. 

Having multiple business entities adds another complicated layer to business management. Hiring a cannabis accountant will help you manage that complexity.  You’ll be able to maximize your deductible expenses and be more profitable.  

Keep Accurate Records

Accurate records are vital for 280E compliance. You’ll have confidence knowing that you’re prepared if any of your deductions are put into question or if you are audited. Document and itemize everything. It is equally important to have full documentation around any and all cash transactions. Cash is used in cannabusinesses, much more than most other types of businesses, and it is important to keep complete and accurate records. An accounting professional who specializes in cannabusiness will set up the proper cash handling procedures to properly track all cash transactions and help protect you from theft.  

Know Your Expenses and Plan Accordingly

Know what will and won’t be considered a taxable expense so you can be better prepared. Having a solid understanding of your deductions will help ensure you pay the correct taxes and won’t be surprised with a hefty bill during tax season. Better yet, hire someone to do the heavy lifting for you.

Use Time Tracking Software

Keeping track of employee time and tasks is essential for an organized business and for 280E compliance. Under 280E, the wages of some tasks employees may do are deductible, and others are not. For example, you might have an employee that does both cultivating and budtending. The wages involving cultivating will be tax-deductible, but you won’t be able to claim deductions for budtending. 

The easiest and cleanest way to keep track of wages is through a time tracking software. Have employees specify the tasks they are doing in the software, so you’ll know which wages are deductible.

Be Ready for Audits

Section 280E is at the forefront of all cannabusiness audits by the IRS. Be prepared to be audited, so you’re not left reeling if the time comes. By following the above tips, you’ll be ready for any audit that comes your way. Accurate and compliant records are the key to smooth audits, and an accounting professional can help make sure your books are in perfect form. 

Leave it to the Professionals

The easiest way to be compliant with Tax Code 280E is by hiring an accounting professional that specializes in the industry. We’ll be able to keep your financials accurate and compliant, so you’ll get to maximize your deductions and conquer any audits. Book a call with me today and find out how you can get back to the green.