MMFLA Tax 280E

[Guest Josh_Colton]

The creation of the MMFLA is anything but a simple application process like we see with the MMMA. The requirements include, but are not limited to, Background investigation, municipal property approval, and application preparation. 

If this sounds easy I apologize for being misleading but the reality is that this will be anything but that. This is heavy government regulation and heavy compliance and maybe even above and beyond that this will be HEAVILY TAXED by the state and also the IRS. 

Today I would like to focus in a bit on the IRS side of things and specifically 280E. 

IRS Taxcode 280E states that:

Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.

This code has led to marijuana businesses being hit with significant IRS audits that have resulted in heavy fines being levied against these businesses, some so severe that they have actually not only been shut down but the individuals who own these businesses are actually personally harmed by the IRS. 

Let me back up and explain this a little bit though... 

Cannabis producers, retailers, and processors are not allowed to take deductions for many of their expenses from their taxable income, as a result they are taxed at a much higher effective rate than other similar business types.

The only deductions marijuana businesses can claim are costs of coods sold, such as labor costs for things like seeding, planting, and cultivating.

They can’t make any deductions attributable to general business activities or marketing activities because of 280E.

There have been some additional cases allowing for limited deductions if a corporation is set up appropriately. 

I plan on going into more depth on these issues going forward, but I wanted to start bringing up this largely alarming issue to both the caregiver and MMFLA Licensee communities. 

If your CPA or Attorney who advises you in these matters is not heavily versed and focused in on this issue, then you are entering a very dangerous area. The only way to avoid the IRS penalties that destroy businesses and lives is to put in the necessary structuring, preparation, and procedures. The best advice that can possibly be given is SPEAK TO AN EXPERT!!

-Josh Colton

[semicaregiver]

Josh,

Thanks for the info.   So if I understand what you are saying, "costs of goods sold, such as labor costs for things like seeding, planting, and cultivating"    I could as a "grower" licensee or caregiver deduct virtually all my costs except marketing??

[Guest Josh_Colton]

Semicaregiver, thank you for reaching out.

It is important to remember that from a legal perspective all involvement in medical marijuana activity is federally illegal, and therefore declaring taxes to your caregiver business would be highly incriminating if an investigation were ever being formed against you. This information could also be manipulated in any potential state criminal investigation against you as well. 

On the other hand not paying taxes on income is illegal in its own right. 

This has resulted in many individuals such as yourself being stuck between a rock and a hard place. 

The best way to handle this is to consult with both a legal expert and a tax expert before making any rush decisions. Understand though that a legal expert is going to have an obligation to inform you of serious criminal liability attached to this, while a CPA is going to tell you that nothing is more important than paying taxes. 

I know i've gone on a bit of a tangent from your initial question, but I thought it was important to fully answer your question. In regards to which of these items specifically is deductible, each item should be reviewed by an accountant who is familiar with 280e law. 

License holders under the MMFLA will be open and obvious as to their actions through the Seed to Sale tracking, so they will be much more strictly tied to IRS 280e. 

If you have any further questions or need further clarification please feel free to reach out 

Josh_Colton

 

[semicaregiver]

Josh,  Thanks for your follow up.   I am not applying for any of the licenses under the MMFLA, but I have been fascinated with the number of people that appear to be interested and the lack of awareness many seem to have regarding the start up costs and the competitive market they will need to operate in.   Your post piqued my interest, I was disappointed that you were not able to answer my question, but I was able to find an informative white paper on the subject....

 

https://www.newcannabisventures.com/how-cannabis-companies-can-reduce-their-280e-tax-burdens/

[Guest Josh_Colton]

Yes, I 100% agree with your comment concerning the lack of awareness of potential start up costs and also how strict the government and IRS compliance standards will be. To say the least there is going to be a much much smaller profit margin than people anticipate. Based on many conversations I have had with individuals operating in commercial systems across the country, there is a lot of misconception about how profitable these businesses really are, as many of them are still spending more than they are making. 

I apologize for not providing a more thorough answer in regards to the 280e implications, as you have found in the article you read the basic idea is that costs associated with the growing side of marijuana deductible, where as the retail side is generally 280E liable. However, I was not confident enough to comment on how that would play out when you are dealing with a caregiver, who acts in both the role as manufacturer and "trafficker", versus on the commercial side where there is more division between the two. I would proceed with extreme caution when it comes to labeling which of the actions should be and shouldn't be 280E exempt.

Thank you for sharing that article. It is very informative.