Federal banking and taxation laws have created big challenges for the swelling legal cannabis market. Dispensaries face costly 24/7 security issues and much higher tax bills than other types of businesses.
Tax specialist Craig W. Smalley has some advice about how to navigate tax pitfalls in this industry plagued by conflicts between state and federal law.
The most important thing to do, Smalley says, is to understand the nuances of your particular state’s laws. Find a team: attorneys, accountants, and tax advisors with a proven history in the industry. You’ll need them, because legal cannabis is one of the most heavily audited industries.
280E is a tax headache for dispensaries
Section 280E of the IRS code means businesses that deal in cannabis, which the federal government still rates as a Schedule I drug, cannot deduct any of their business expenses when filing federal taxes.
Some businesses have tried to deduct their marijuana expenses by splitting their businesses in two, usually by selling other products under the same roof. This practice is called CHAMP, named after the case Californians Helping to Alleviate Medical Problems vs. Commissioner.
But recklessly going the CHAMP route can be a bad idea that might spell the end of a business. In a 2015 case, Olive v. Commissioner, a medical dispensary that also offered free movie nights and yoga classes was found to be in violation of 280E because there was not an aggressive pursuit of profit on the non-marijuana side of the business. The higher tax bills swiftly drove the dispensary under.
For growers, however, 280E does not have as much of an impact, because most of a cultivator’s expenses go to growing, Smalley says. If growing expenses are factored into the cost of the product sold, it is not deductible as a business expense.
Hope for federal reform?
Some federal help for tax-burdened cannabis businesses has been floated. Proposed legislation in the House and Senate that would exempt legal cannabis businesses from Section 280E, but both bills are stalled in committee.
Despite tax and banking problems, the legal cannabis market is projected to grow at a 17% compound annual rate.
Rescheduling of marijuana would be a big step that would take care of many problems, but don’t hold your breath. Any federal reform is likely to be more incremental. For now, find a team of experts that can help you navigate these important aspects of your business. Local growers’ networks are a good place to start.