IRC 280E is a section of the U.S. Internal Revenue Code (IRC) that disallows businesses involved in the trafficking of controlled substances, such as cannabis, from taking normal tax deductions and credits. This means that even if a cannabis business is operating legally under state law, it may still be subject to federal tax at a higher rate, as it cannot deduct many of its normal business expenses.
The purpose of IRC 280E is to prevent illegal drug traffickers from taking advantage of the tax code and reducing their tax liability. However, it has also had the unintended consequence of creating significant tax burdens for legitimate, state-legal cannabis businesses, which are already operating in a highly regulated and often hostile legal environment.
This has been a major issue for the cannabis industry, as it creates a disadvantage for these businesses compared to other industries, and can make it difficult for them to compete and succeed in a challenging business environment.
IRC 280E Strategies
There are a few strategies that cannabis operators can employ to help mitigate the impact of IRC 280E:
Structuring the business properly
By carefully structuring their operations and separating different aspects of their business into separate entities, cannabis operators can help to minimize the impact of IRC 280E. This may include creating separate entities for different aspects of the business, such as cultivation, manufacturing, and retail.
Keeping accurate and detailed records
Accurate and detailed record-keeping is essential for cannabis operators in order to be able to accurately calculate their tax liability under IRC 280E. This may include keeping separate records for different aspects of the business, as well as documenting all expenses and income.
Hiring a qualified tax professional
Hiring a qualified tax professional who has experience with IRC 280E and the cannabis industry can be incredibly helpful in navigating the complex tax landscape and finding ways to minimize the impact of this rule.
Seeking legislative change
Finally, cannabis operators can also work with industry associations, advocacy groups, and lawmakers to push for legislative change that would modify or eliminate IRC 280E, making it easier for cannabis businesses to operate and compete on a level playing field with other industries.
It’s worth noting that navigating IRC 280E can be a complex and challenging process, and cannabis operators should always seek the guidance of a qualified tax professional in order to ensure compliance with all applicable rules and regulations. Make sure you check our Cannabis Finance Bootcamp.