In this blog post, we will discuss the 280E tax code, how it works, and explore ways you can legally avoid paying it on unnecessary expenses.
We will also cover how technology can help keep you compliant with the law and avoid losing your dispensary license or worse.
What is tax code 280E?
The 280E tax code was created as a way to prevent businesses dealing in illegal controlled substances from deducting ordinary business expenses from their gross revenue for tax purposes. This code applies to any business that sells illegal drugs (Schedule I and Schedule II), and this includes cannabis dispensaries.
Although many things have changed since then - it is still important for dispensary owners to understand how these legislations and codes affect their business.
According to a report by the Congressional Research Service, Section 280E of the Internal Revenue Code (IRC) denies deductions and credits for amounts paid or incurred in carrying on the trade or business of trafficking controlled substances (within the meaning of Schedules I and II of the Controlled Substances Act) in violation of federal or state law.
Because cannabis is still illegal on a federal level and classified as a Schedule I substance, dispensaries cannot deduct any business expenses. This means dispensaries are taxed on their gross income rather than their net income.
For example, let's say a dispensary has a gross income of $100,000 in one year. Typically, businesses can deduct things like rent, utilities, employee salaries, and other business expenses. However, because of 280E, dispensaries are not able to do this. The dispensary would then be taxed on the entire $100,000, resulting in a tax bill of tens of thousands of dollars.
280E was created to make it harder for drug dealers to operate by making it more expensive for them to do business. However, many believe that 280E is unfair to dispensaries because it puts them at a disadvantage compared to other businesses.
How does tax code 280E work?
The 280E tax code prevents dispensaries from claiming business expenses on their taxes on expense items that are directly plant-facing. This means that dispensaries are taxed on their gross income and cannot deduct any expenses. This can be a huge financial burden for dispensary owners who are already operating on thin margins.
According to tax code 280E, the prohibited deductions include deductions of "ordinary and necessary" business expenses under IRC Section 162(a), state and local taxes under IRC Section 164, losses under IRC Section 165, and depreciation under IRC Section 167.
In addition, 280E also prevents dispensaries from claiming the home office deduction and the medical expense deduction.
Tax code 280E can also make it difficult for dispensaries to get loans and other forms of financing. This is because lenders typically want to see a business's tax returns to determine whether they are a good candidate for a loan. However, because dispensaries cannot show their tax returns, many lenders are unwilling to give them loans.
280E can also make it difficult for dispensaries to get insurance. This is because insurers often use tax returns to determine premiums. Without being able to show their tax returns, dispensaries may have to pay higher premiums than other businesses.
Is 280E going away?
Perhaps; there has been some discussion about repealing 280E, but so far nothing has been done. In 2017, Congressman Curbelo introduced a bill called the "Reforming America's Taxes Equitably (RATE) Act" which would have repealed 280E. However, the bill did not make it out of committee.
There is also a bill called the "Small Business Tax Equity Act" which would exempt dispensaries from 280E. However, this bill has also not made it out of committee and it is unlikely to be passed into law.
There have also been famous bills like the MORE Act and the SAFE Banking Act which have both gone through the House of Representatives but have both failed in the Senate. Both these bills would have cleared the road for cannabis dispensaries regarding tax code 280E but just like every other effort to streamline cannabis banking, financing, and taxation, they failed to make it into federal law.
On the other hand, the easiest way for tax code 280E would be for cannabis to be legalized on a federal level and taken out of the Controlled Substances Act as a Schedule I drug.
This would make 280E moot, and cannabis dispensaries could operate like any other business in the United States, claiming tax deductions and credits to the extent permitted under conventional tax laws.
Some people indeed believe that 280E will eventually be repealed because it is unfair to dispensaries.
Furthermore, the wave of cannabis legalization sweeping across the United States is bound to make a dent in Washington's resolve to keep cannabis on the Schedule I list of controlled substances. It is only a matter of time before Congress catches up to the people's will. However, there is no guarantee that this will happen. So, for now, dispensaries need to find ways to work around 280E and ensure they comply with the law.
Does 280E apply to growers?
Yes, 280E applies to growers as well as dispensaries. Any business that sells cannabis or cannabis derivatives like CBD is subject to 280E. This includes businesses that grow and sell cannabis products as well as businesses that provide services like consulting or testing.
The 280E tax code applies to people who are "plant-facing," which means they must physically touch cannabis buds for their position in a cannabis business. So if the grower touches the plant that day then yes, 280E does apply to them.
However, if they don't handle the plant directly that day and instead handle other business operations for the farm like administration or oversight, then 280E might not necessarily apply to them. In this situation, it all depends on how you structure your personnel, their roles, and manage their shifts as we shall see in the next section.
Can I avoid the 280E tax?
There is no legal way to avoid paying 280E taxes especially if you are in a plant-facing role or if your business model is plant-facing. However, there are some ways that you can minimize your tax liability while also staying compliant with the 280E tax code like using KayaPush software.
It is important to note that the loopholes we are about to share are not illegal but rather a smart way of organizing your personnel to ensure that your tax burden is as low as possible.
The first loophole is what is known as the 'Cost of Goods Sold' loophole. The Cost of Goods Sold is the only acceptable deduction for cannabis farmers and dispensaries so you need to ensure you are calculating your Cost of Goods accurately and not leaving any expense out.
Cost of Goods Sold is defined as the expenses directly related to the preparation of goods for sale. For example, for a cannabis farm, the Cost of Goods Sold would include the cost to lease the farmland, the seeds, the water, electricity, labor, and any other expense incurred to grow the plants.
For a cannabis dispensary, however, the Cost of Goods Sold only refers to the amount the dispensary paid its suppliers for the products it is selling. That being said, dispensaries can maximize the value of their 'Cost of Goods Sold' by using the LIFO method of accounting for inventory (Last In, First Out) instead of FIFO (First In, First Out). This is especially true for the non-perishable products that the dispensary is stocking.
LIFO means that the business prioritizes its latest inventory for sale first before the older inventory. The impact of this in an inflationary economy where costs are almost always rising is a higher cost of goods sold, higher inventory turnover and lower inventory amount in the balance sheet. As a result, LIFO would minimize the amount of 280E tax your dispensary is paying.
The second loophole that could help you reduce your tax burden under tax code 280E is by structuring your roles to keep plant-facing roles separate from the non-plant-facing roles that are exempt from 280E.
Consider a scenario in which you operate as a budtender and a non-plant-touching operations manager at the same dispensary. In that case, you may punch in for your morning shift as a budtender, paying the 280E tax, and then shifting roles to take on responsibilities as an operations manager for your non-plant-touching tasks in the afternoon.
KayaPush time tracking software can be used to track employee productivity in a timely and legal manner. This technology was originally designed for shift workers who might be bartenders in the morning, then shift supervisors in the afternoon. Using this technology and principle, the cannabis industry has the opportunity to avoid payment of the 280E tax when it is legally applicable. By creating two separate roles that confirm your plant-touching status, cannabis accountants will feel comfortable signing off on the tax applications.
As you can see, it is a bit complicated structuring your organization in a way that helps you keep track of your plant-facing tasks and roles and the non-plant-facing ones. To ease this process, we would recommend using software like KayaPush's time tracking technology and consulting with a tax accountant before filing your taxes.
How can technology help me with the 280E tax?
Some cannabis software can help you minimize your tax burden resulting from tax code 280E. With KayaPush's time tracking software, you can ensure that plant-facing tasks and roles don't overlap with non-plant-facing roles to ensure that your staff only pay 280E tax when executing plant-facing tasks.
In addition to time tracking software, there are also compliance software programs like Cova and Flowhub that can help you stay compliant with state and local regulations. These are point-of-sale systems designed specifically for cannabis dispensaries while also helping you track your inventory from seed to sale.
How do I submit 280E taxes?
280E taxes are submitted on Form 8854. This form must be attached to your federal tax return (Forms W-12). Here you must also include information about your gross receipts, total expenses, and taxable income. You can use dispensary payroll software like KayaPush to automate payroll tax calculations and remittances.
Using these tools will ensure that you are accurate while simplifying your dispensary's entire tax filing process.
Can other technology help keep me compliant?
There is other cannabis technology that can help keep you dispensary compliant, including dispensary payroll software, dispensary accounting software, compliant POS solutions, track and trace technology, project management software, and dispensary HR software. Furthermore, there are other software programs that can help dispensaries stay compliant with state and federal laws.
For example, you can ensure that you are using compliant dispensary payroll technology to keep up with the changing laws. This can help ensure that you are always compliant with the latest regulations.
You can also use state traceability with a seed-to-sale integrated POS. This can help you keep track of everything that happens along the supply chain, which is crucial for ensuring that cannabis and its products do not fall into the wrong hands, or get contaminated by coming into contact with any hazardous substances.
Here are more tips to keep your dispensary compliant with regulations, including the 280E tax code
- Digitize your licenses and renewals
- Select POS software with purchase limit alerts and built-in ID
- Create customizable clock-in surveys
- Consult with a cannabis tax accountant and attorney to ensure that you are complying with both state and federal regulations governing cannabis businesses.
Technology is constantly evolving and new software programs are being developed to help dispensaries with 280E tax compliance. As a cannabis dispensary, staying up-to-date on the latest compliance news and technologies is essential.
280E tax code can be complex, but by working with a tax accountant and using time tracking software like KayaPush, you can ensure that your dispensary is compliant while also minimizing your tax burden.
If you have questions about navigating 280E taxes or which technology is right for your dispensary, please get in touch with us at KayaPush. We would happily chat with you about your specific needs and make recommendations accordingly.
Want to ensure you are keeping your staff and dispensary compliant during the hiring and training process? Download our free guide!
