The cannabis industry has been growing at a rapid pace since its legalization in several states in the US. However, one major roadblock for the industry is the tax code 280E, which prevents cannabis companies from deducting business expenses from their taxable income. This has created significant financial challenges for the industry, as it is subjected to much higher tax rates compared to other businesses.
280E was enacted in 1982 as a response to drug traffickers who tried to deduct their expenses from their taxable income. The code disallows any deductions or credits for businesses trafficking in Schedule I or Schedule II controlled substances, which include marijuana. As a result, cannabis businesses can only deduct cost of goods sold (COGS), and not other expenses such as rent, employee salaries, or marketing costs.
The impact of 280E is substantial, as it can result in tax rates as high as 70% for some cannabis businesses. This has made it difficult for companies to compete with one another, as well as with businesses in other industries. Plus, the high tax rates have limited the ability of cannabis companies to reinvest in their businesses, making it harder for them to grow and expand.
Despite the challenges posed by 280E, the cannabis industry has continued to grow, with many companies finding creative solutions to overcome the tax code's limitations. Some companies have structured their businesses to minimize their taxable income, while others have focused on reducing costs through economies of scale.
Operators are generally able to deduct COGS for equipment, storage, and packing. This can vary widely between states and operators, so it’s best practice to track COGS closely and remain audit-ready. Businesses often rely on an ERP (enterprise resource planning) software to closely track COGS throughout the year. Another benefit of using and EPR software is the efficiency in which operators can assign COGS and generate reports.
The long-term effects of 280E on the cannabis industry are uncertain. If the tax code remains in place, it is likely to continue to limit the growth of the industry, making it difficult for companies to achieve their full potential. On the other hand, if the code is amended or eliminated, the industry could experience a significant boost, as companies would have more resources to invest in growth and innovation.
280E is a significant barrier for the cannabis industry, as it imposes high tax rates that limit the ability of companies to invest in their businesses. While the industry has adapted to this challenge, the long-term effects of 280E remain uncertain. Whether the tax code will be amended or eliminated remains to be seen, but its impact on the cannabis industry is significant.