10 Tax Tips for Cannabis Investors and Entrepreneurs

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The marijuana industry faces some specific tax rules both on federal and state levels.  Most entrepreneurs are interested to know which expenses they can deduct from their business federal income tax.  Under normal circumstances, a business can deduct all its usual and ordinary business expenses incurred in the same year.  When it comes to the marijuana industry, things are a bit more complicated.

No Expenses Deduction Allowed: IRC Section 280E

In terms of this section, no one is allowed to deduct expenses incurred to secure income from the trafficking in controlled substances.

Yes, this means that if you are a smuggler, you have to declare your smuggling income, but you are not allowed to deduct any of the expenses you incurred while securing your illicit income.

Under federal law, marijuana is still a controlled substance, and as such, hence a marijuana business is still considered an illegal business operation. However, it is not this simple either.

Cost of Sales is Allowed to Be Deducted

Under Section 1.61-3(a) the costs of goods sold is not a deduction. The cost of goods sold is deemed to be a reduction in gross income.  Despite IRS 280E then, the costs of the goods sold in the legal marijuana industry can be “reduced” against total sales income as long as consistent methods used by the vendor determines the costs of goods sold. 

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