Video: How To Adapt Your Business To 280E

For businesses in the cannabis industry, taxes can be an annual pain point. They’re different every year, and every new forecast has to be factored into the cost of operating your business. But for savvy owners, those fluctuations can also provide opportunities to optimize operations and reduce costs.

280E of the Internal Revenue Code (IRC) penalizes traffickers of Schedule I or II drugs by barring the deduction of “ordinary and necessary” business expenses—including below-the-line deductions—after having reduced gross receipts by cost of goods sold, or COGS. This means your business must now adjust its operations accordingly in order to continue operating under current financial circumstances while also remaining profitable.

This video looks at what 280E means for cannabis businesses and how you can adapt accordingly.

A common question I get asked after I've explained to someone entity selections and then what is 280E and why they're subject to it is: how can I get around 280E? This sounds horrible. I can't be in business if I have 280E.

And I'm being melodramatic. But they've hit the nail on the head. I really like it when that spark of understanding comes into the client's eyes because they understand how serious this is. They understand how dedicated they need to be to the actual business of doing their business if the first thing they're trying to do is figure out how to get around something that's going to kill their business.

The short answer is you can't get around 280E. 280E is a required code that has to be applied to your cannabis business. But understanding what costs are allowable and cost of goods sold based on the relationship that your practitioner and you have in the understanding of your costs in relationship to inventory. So educating yourself about inventory, educating yourself about the code sections in the tax code that dictate how we as practitioners need to look at inventory, is crucial.

Code section 471 is the original code section that deals with inventory. The Tax Cuts and Jobs Act came in 2018 and added another 471 provision, 471C, into the mix. There's no silver bullet in any of these code sections. They require diligence. They require thoughtful understanding, and they require the ability to be able to say how do my costs, how does the money I'm spending relate to inventory or not relate to inventory.

Again, because you're running a business, some of your money has to not relate to inventory. In our parlance, it's called SG&A: selling, general, and administrative costs. Again, your meals and entertainment, your travel, your website, your advertising, your contract labor. Those are the things that are the business of doing business. What Congress does not like is the business you're doing. Those expenses are subject to 280E.

How do you get around 280E? You don't spend your money in those areas as much as possible. You limit that. So for owners, I say great. I really want you to be paid. How about you do the janitorial function instead of charging that to someone else? Or how about you lean in a little bit more in order to be able to understand where your business needs support and not spend the money on consultants, or very expensive advertising when you might be able to get out there and do a little bit more of that yourself.

There are definitely places you can't do it yourself. There are places we must rely on the business of the world to help us do our business. But in the places where you can make savvy business decisions about how you spend your money, that's how you reduce the amount of money going into non-deductible expense. We're never trying to get around 280E, but avoid it as much as feasibly possible for your cannabis business.

To learn more about how Indiva Advisors LLP can help your cannabis business adapt to the realities of 280E, please reach out to schedule a consultation.