Key Accounting and 280E Implications for Medical Marijuana Businesses

Recently, I wrote an article on accounting and 280E for medical marijuana businesses that was published in The Asset, the publication of the Missouri Society of CPAs.

This is a summary of key areas to evaluate for marijuana related businesses and their finance teams.

Article Highlights

The Challenge

When it comes to taxes, marijuana related businesses are not just like any other business.

Though cannabis businesses are now legal in some state laws, they are still illegal under federal law. As a result, these businesses need ethical and competent professional tax advice.

Be Aware of 280E

Federal statute 280E refers to a single sentence in the tax code.

Section 280E allows a cannabis business to deduct expenses related to cost of goods sold, but doesn’t allow for the deduction of selling, general, or administrative expenses.

Numerous court cases have upheld the provisions of 280E in judgments that favor the IRS.

Understand the Tax Impact on the Bottom Line

The tax impact of 280E on a cannabis business is best shown when compared with a traditional business.

cannabis tax burden 280E
In this example, none of the overhead expenses are deductible for the cannabis business, per 280E.

Example

This sample profit and loss statement comparing cannabis business vs. traditional shows the impact of 280E.

This extra tax burden can be an unwelcome surprise for the unprepared business owner—and can significantly reduce net income.

Accounting for Inventory

While marijuana related businesses can’t avoid the provisions for 280E currently, the best strategy to minimize its tax impact is to become well versed in accounting for inventory.

When required to use an inventory method, a taxpayer is also required to use an accrual method for purchases and expenses.

A good starting point for understanding the specific rules on accounting for inventory is IRS §471 (IRS §263A rules are not applicable here).

Documentation and Recordkeeping

Sound accounting policies and well-documented procedures have been the key to success when organizations have succeeded in their challenges to IRS audits.

  • Be consistent in allocation methods and document methodology, especially considering how easily the IRS can reclassify cannabis business expenses as non-deductible.
  • Don’t expect any leniency for missing or poor recordkeeping.
  • Maintain the highest level of ethics and professional standards.

The Importance of Court Cases

A long list of marijuana related business owners are facing significant fines and jail time for choosing to neglect the tax rules. It’s important to stay familiar with current court cases and regulatory guidance.

Other Accounting Areas to Consider for Cannabis Businesses

MRBs should also have their accounting team assist them with internal controls, cash handling, banking matters, security, and state-specific compliance requirements.

Read the full article.

More Information

Our team at Smith Patrick CPAs will continue to share best practices for cannabis businesses and keep you informed. For help with your marijuana business strategy or tax needs, reach out to us at 314-961-1600 or schedule directly here to discuss your situation.

David Smith helps businesses and individuals develop smart business practices for tax and accounting advantages as the president of Smith Patrick CPAs. He serves on MOCPA’s Legislative Policy Task Force and MOCPA’s Firm
Leadership Committee.

Smith is also involved in the Missouri cannabis industry through MoCannTrade and other organizations, helping cannabis operators with their tax and accounting needs. Reach him at 314-961-1600 or schedule directly here.

About Smith Patrick CPA

Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.