On federal level marijuana is illegal because of trafficking in controlled substances.
Since many states sanctioned marijuana as a legal commodity for consumption, the IRS carries the big stick codes for indirect enforcement. Under section 280E: Marijuana businesses are required to file federal income tax returns." Based on this rule, enterprises cannot deduct the cost of facilities, marketing, payroll and all carrying costs. A twist to this insanity - operators can deduct the cost of growing marijuana. However, the category under “cost of good costs” is highly restrictive and clinically enforced. Indeed, 280E is the major impediments to access in the legal cannabis business.
Conventional business models require the amendment to IRS 280E. Without it, investors do not have the means to determine the cost of operation and profits. At present, marijuana-based companies are paying, on average, 70% of collective taxes on gross sales, while conventional entities are pay less than 30%. Excluding black market sales, a current practice to generate net cash flow, legal, creative thinking is necessary to reduce the current tax load and stay in the gale until the feds have a change of heart and make pot legal. The time frame for such an event may be four years away, and the enterprises who remain “active” in the states-based cannabis markets can reap significant dollars. If legal pot in Canada is an example – billions of dollars are on the table for U.S. based companies.
So what’s the best means for a U.S. based pot company to “stay in the game”?
Segregation the tax burden by dividing the entire operations into standalone sections or affiliates. Each unit would support the whole but in legal areas were deductions are allowed.