As marijuana becomes legalized in more and more states, there is potential for a lot of economic opportunities. Job creation, increased state revenue, etc. Despite the opportunities it gives, there is also a downfall. The downfall is the tremendous obstacles that cannabis business face. High taxes, audits, regulations, required cost accounting, and being legal at the state level and illegal federally are effects of section 280e. While there are proposals that could eliminate some of these issues, until they are actually enacted, marijuana business owners have many obstacles to hurdle.
So basically, section 280e disallows tax deductions for expenses incurred in the business or trade of schedule I and II narcotics, i.e. marijuana. On a federal level, they are considered trafficking an illegal substance. However, business owners may find SOME relief with section 199A – Deduction for Qualified Business Income (QBI). In order to qualify for QBI, the entity must either be setup as a Partnership, S-Corp, or a sole proprietorship.
Section 199A does have a wage and property basis limitation. Thus, the business owner would need to stay below these thresholds. Section 280e disallows expenses when determining a cannabis passthrough, but it would be allowed on the owner’s share of income on his/her return. One factor that also gets thrown into the mix is whether a retailer is medical or non-medical. If they are medical, then they do not fit into the criteria of SSTB. Thus, no QBI deduction would be allowed.
Another option that a business owner may consider in getting the section 199A deduction is operating separate entities. One, non-cannabis and the other, cannabis. But be careful! The non-cannabis business has to be a fully functional operating business on it own.
Business owners who fall under the income thresholds of 199A can take advantage of the 20% passthrough deduction without concerns for W2 wages or falling within the definition of an SSTB. However, those businesses that are above those income thresholds struggle with many obstacles. Congress has various options available to reduce or eliminate the tax burden that cannabis business owners feel via section 280e. One proposal would be to legalize marijuana federally. Without some type of relief offered by Congress, owners will continue to feel the heavy burden of high taxes. If you are a cannabis business owner, ask for a free consultation today.