Is It Possible? – Write Off Cannabis
For cannabis businesses, one of the most pressing questions is whether they can write off expenses related to their operations on taxes. Unfortunately, the answer is more complicated than a simple yes or no, due to a complex intersection of federal and state tax laws. Understanding these nuances is critical for cannabis dispensaries, cultivators, manufacturers, and other businesses in the industry.
The Federal Tax Challenge: IRS Section 280E
The primary reason cannabis businesses cannot deduct typical business expenses at the federal level is due to IRS Section 280E. This provision was enacted to prevent illegal drug dealers from deducting business expenses related to their illicit activities. Because cannabis remains classified as a Schedule I controlled substance under federal law, businesses that deal with marijuana are subject to 280E.
Under Section 280E, cannabis businesses cannot deduct most of their operating expenses, such as rent, utilities, wages, and advertising costs. This creates a significant tax burden, as businesses are required to pay taxes on their gross income—without the benefit of common tax deductions available to other industries.
The Exception: Cost of Goods Sold (COGS)
While 280E restricts many deductions, there is one important exception: Cost of Goods Sold (COGS). This refers to the direct costs incurred in the production or acquisition of the cannabis products sold by the business. COGS includes things like the cost of raw materials (e.g., cannabis seeds), labor costs directly involved in production, and other direct expenses related to the creation of the product.
For example, a cannabis cultivator can deduct the costs associated with growing the plants, including labor, utilities for the growing facility, and the cost of soil and nutrients. Dispensaries can deduct the cost of purchasing cannabis from producers. However, these deductions are limited to the direct costs of the product and don’t extend to broader business expenses like marketing, legal fees, or office rent.
State-Level Deductions
While federal tax law is stringent, some states have more lenient tax rules for cannabis businesses. In certain states, businesses may be able to take broader deductions that aren’t allowed federally. Ohio, for example, offers some relief by allowing cannabis businesses to claim additional deductions under state corporate tax law. However, it’s important to remember that these state-level deductions do not eliminate the impact of federal 280E restrictions, meaning cannabis businesses still face a heavier tax burden than those in other industries.
Conclusion
In short, cannabis businesses can write off Cost of Goods Sold (COGS), but they cannot deduct most ordinary business expenses under federal tax law due to Section 280E. Although state-level tax laws may offer some deductions, the challenges posed by 280E remain significant.
Our dedicated team at Dimov Tax stands ready with a specialized approach in cannabis taxation. Reach out to us today to manage these complicated regulations.