By rescheduling marijuana, all businesses along the supply chain suddenly have new expenses available for deduction. Shown here is an example of missed expenses due to rule 280E. Can you imagine not deducting $153,806 from your taxable income, knowing that other small businesses can? By moving to schedule 3, of which 280E does not apply, marijuana businesses are suddenly able to deduct so many more expenses, and lower their tax burden on revenue. Currently the IRS has this on their website:
“IR-2024-177, June 28, 2024
WASHINGTON — Until a final federal rule is published, the Internal Revenue Service today reminded taxpayers that marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code.
The law with respect to the schedule or classification of marijuana has not changed. Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment.
Although the law has not changed, some taxpayers are filing amended returns. The grounds for filing such claims vary, but these claims are not valid. The IRS is taking steps to address these claims.
Section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.
This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana. Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.
On May 21, 2024, the Justice Department published a notice of proposed rulemaking with the Federal Register to initiate a formal rulemaking process to consider rescheduling marijuana under the Controlled Substances Act. Until a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.
The IRS has an existing set of frequently asked questions and other information related to the cannabis industry on IRS.gov.”
Here is another example of the difference rescheduling marijuana can make. If you intend to carve out space in the ancillary services sector, this absolutely pertains to you. Under normal small business IRS codes and statutes, most ancillary services are deductible as a part of doing business, but as you can see in this example, the tax rate comparison between these two businesses is drastically different. Schedule 3 changes this paradigm and allows small business to utilize and deduct ancillary services, essentially carving a new path for support in the cannabis sector.
This from Perpetual CPA
280E and Cost of Goods Sold (COGS) Accounting
Deductibility of Design and Branding Work
- Design and Branding Work: Typically, expenses related to design and branding, including product packaging and interior spaces for retail, are not deductible under 280E. These expenses are generally considered marketing and selling expenses, which are not directly tied to the production of goods and therefore do not qualify as COGS.
- COGS Framework: Under IRS guidelines, COGS includes expenses directly related to the production of goods, such as raw materials, labor for production, and certain indirect costs like utilities and rent for production facilities.
Security Installation, Transportation, and Protection Services
- Security Installation: Expenses for security installation directly related to the production facility can sometimes be included in COGS. However, security costs for retail spaces are usually not deductible.
- Transportation Services: Transportation costs directly associated with bringing raw materials to the production facility may be included in COGS. Transportation of finished goods to retail locations typically does not qualify.
- Protection Services: Similar to security, protection services for production facilities can potentially be included in COGS, but those for retail locations are generally not deductible.
Quick Reference for Non-Deductible Services
- Non-Deductible Services: As a rule of thumb, expenses not directly related to the production or manufacturing of the product are non-deductible under 280E. This includes:
- Marketing and advertising
- General administrative expenses
- Selling expenses (e.g., retail security, sales staff wages)
- Office supplies and equipment