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How does IRS Regulation 280E apply to your cannabis business?

On Behalf of | Sep 7, 2022 | marijuana businesses

Marijuana remains illegal under federal law. Therefore, some federal laws continue to curtail cannabis businesses, even though they may be legal at the state level. They include laws like Section 280E of the Internal Revenue Code that prohibits businesses dealing with certain controlled substances like marijuana from deducting business expenses related to operational activities. You can only deduct the cost of goods sold from the income tax. 

As a result, your cannabis enterprise cannot benefit from income tax deductions like ordinary businesses. It could negatively affect the financial health of your business, given that it is still an emerging industry.

Your business may be protected

Fortunately, the law in California accords cannabis businesses with some privileges regarding tax deductions. It allows these businesses to make the necessary business expense deductions when filing their taxes. However, it does not apply to every enterprise, as discussed below.

What businesses can enjoy tax deductions?

Only cannabis businesses licensed under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) can take advantage of tax deductions in California. The Act provides a framework for the licensing, enforcement and oversight of cannabis businesses.

For cannabis corporations operating under California’s Corporation Tax Laws, nothing changes since they were already permitted to make these deductions before the law took effect. In addition, cannabis operations cannot take advantage of franchise and income tax exemptions since they don’t meet the appropriate IRS codes. 

Making the most of the dynamic legal landscape

If you are thinking of or have already invested in the cannabis industry, it is crucial to be aware of such changes in the law and take full advantage of them to give your business the edge.

Beyond the financial benefits of, say, making tax deductions, you will also ensure your business is compliant with the regulations. It could save you from potential legal liability for breaking the law.