Cannabis businesses face many challenges, to say the least. While states have legalized medicinal and recreational use, the federal government keeps cannabis illegal, listed as a “schedule 1 drug” under the Controlled Substances Act. The government’s DEA website says, “Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse.” While we know there is plenty of evidence that cannabis does have medicinal value, the government has not yet been able to come to an agreement on deschedulizing cannabis. Because cannabis is ‘stuck’ as a schedule 1 drug, cannabis businesses are unable to access traditional banking options. Banks are federally insured, and since the government classifies cannabis as an ‘illegal’ activity, they will not insure or back up any banks that work with cannabis companies. Because of this, very few banks across the country will agree to work with cannabis companies. This leaves 99% of all cannabis businesses dealing in all cash. Besides this side effect of schedule 1 classification, cannabis businesses are also subject to the IRS Tax Code 280E, which states that "no deduction or credit shall be allowed in running a business that consists of trafficking a controlled substance." This means that in short, cannabis businesses cannot take normal tax deductions, such as rent, utilities, payroll, insurance, and so much more. Cannabis businesses are then taxed off of their gross sales, rather than the net after expenses. This can often put a company out of business. But it brings up an interesting question of why? Why is the government taxing something they call ‘illegal’? Well that’s an easy answer: they want money, no matter the source! It’s been well established through constitutional amendments and court rulings that the government has the power to “collect taxes on incomes, from whatever source derived.” The United States v. Sullivan (274 U.S. 259) is a Supreme Court case from 1927 that established allowing the prosecution of criminals for evading income tax on their criminal activity. Many criminals have since been prosecuted for tax evasion, including the notorious gangster Al Capone. But while the government took income tax money from these criminals for years, it was never challenged until 1981 in the landmark case of Edmondson v. Commissioner. In that case, Tax Courts allowed a trafficker of amphetamines, cocaine, and cannabis to deduct ordinary and necessary business expenses related to his illicit drug business. The expenses included rent, packaging, telephone, automobile expenses and the purchase of a small scale. The following year, 1982, Congress enacted Tax Code Section 280E. That tax code’s official ‘Explanation of Provision’ from the Senate Report reads as follows: “All deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed.” However, at the time of passing 280E, Congress had some concern over challenges to the new law. To help combat this, they added one small exclusion to the rule, which was to allow for the deduction of the cost of goods sold. So other than the cost of goods, literally just about everything else is not deductible for cannabis businesses. Some, but not all, of these items disallowed include: • Rent • Salaries • Contractors • Equipment & equipment repairs • Furniture • Office Supplies • Hardware & Software • Legal Fees • Maintenance • Storage • Interest • Utilities • Advertising & Marketing • Bad debt • Theft and Loss • Insurance • Licenses and fees • And even charitable donations So, if we know basically nothing can be deducted except the cost of goods, how are those defined? What does the government consider cost of goods in regards to tax code 280E? Well, for a dispensary or retail store, unfortunately their cost of goods deductions are fairly limited. They can deduct the cost of product and, the costs of acquiring the merchandise, including the transportation costs to purchase the wholesale cannabis. They could also claim deductions for electric bills for designated inventory areas. And that’s about it. Cultivators, producers, extrators, and infusers have a few more cost of goods options they can deduct. Payroll and 280E tax experts, Wurk, share this information on some potential types cost of goods that are allowed include: Raw materials and supplies such as seeds, clones, fertilizer, and nutrients; Indirect product costs, such as equipment maintenance, utilities used to grow cannabis, supervisory wages, and costs of quality control and inspection; And labor for pre-wholesale, such as Trimming and Packaging However, there is nothing provided by the government that lists the specific items that are or are not allowed, so working with a reputable CPA and using extreme caution when taking any potential deductions is strongly advised. From the outside, it may seem that the cannabis industry is a guaranteed gold mine of profits. But the reality isn’t so. In addition to many other industry issues, tax code 280E can cost many businesses more in taxes than they make in profit, and thereby making it untenable. Even those cannabis businesses who can pay their taxes, are often still not able to make a profit, and put all their money into government taxes, rather than back into the business for things such as expansions, improvements, employee benefits and pay raises, and even giving back to the community. The general public needs to be aware of the exorbitant tax burden that is being placed on the cannabis industry. This situation, if left as is, it will lead to higher prices of cannabis for the consumer. It will lead to more black market sales. And, it will lead to many businesses failing. To make things right, cannabis needs to be more than just decriminalized; it needs to be removed from the Controlled Substances Act as a schedule 1 drug, so that it no longer falls under tax code 280E at all. Every cannabis consumer’s help is needed to contact our local government representatives and let them know cannabis does have medicinal value (as studies and testimonials have shown), so it does not meet the definition of a Schedule 1 drug, and therefore it must be removed now from that list of controlled substances. Only by speaking up will the will of the people be heard. We’re the people! Let’s all speak up. Take a few minutes and click here to access an easy way to let your representatives know: Take Action - NORML Comments are closed.
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