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Cannabis Accounting and Section 280E

The cannabis industry is here and accounting and tax are running quickly to keep up with the rules and regulations.

Whether you agree or disagree with legalization of marijuana in the United States, there is a tsunami of activity in the industry that is rippling across the finance and accounting worlds.  Marijuana is legal today in 10 states plus the Washington D.C.  Michigan is the latest state to add itself to the list following the November midterms.  23 states have legalized medical marijuana.  It is estimated that over the next decade, $132 billion in federal tax revenue could be generated and over 1 million jobs in this industry.  Folks, we have a juggernaut on our hands here.

But the accounting rules are complicated and for businesses in cannabis that want to actually build real businesses, these rules must be understood.  One of the greatest areas of confusion is what is allowable as a deduction from income for retailers for the purpose of calculating taxes.

We have a number of cannabis related businesses that come to Stride for bookkeeping and accounting.  But when it comes to tax, we go directly to Dean Guske. Dean is an expert tax accountant in all things cannabis related.

Recently he shared with us the result of a November 29, 2018 U.S Tax Court ruling on a case involving Harborside, a well-known and iconic California dispensary.  The ruling explains in detail expenses for the purposes of calculating gross income (gross revenue less cost of goods sold).

The short story on this topic is that language contained in Section 280E of the Internal Revenue Code prevails and that there are certain expenses that simply cannot be deducted if you are a business that traffics in Schedule I or Schedule II controlled substances as defined in the Controlled Substances Act.

To make this even easier, the only deductions that Harborside can take are the deductions of the purchase of cannabis, plus the transportation costs but excluding any indirect costs.   280E isn’t going anywhere folks.  If you want to get some expert tax advice, reach out to Dean and his team at dean@deanguske.com.  If you want to discuss bookkeeping and accounting for your cannabis related business, contact us.

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