280(e) Information

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Learn More About 280(e)

IRC 280(e) - This regulation is the basis for how we operate in the cannabis space.

Generally Accepted Accounting Principles

GAAP

Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). The purpose of GAAP is to improve the clarity, consistency, and the comparability of financial information. To comply with IRC 471 GAAP must be followed.

The 5 major principles are:

  • Revenue Recognition Principle

  • Historical Cost Principle

  • Matching Principle

  • Full Disclosure Principle

  • Objectivity Principle

Documentation on the methods and procedures used for quantifying all inventory categories, including work in progress, is necessary to ensure the same consistent methods are applied monthly for manufacturing and cultivation and no less frequently than quarterly for a dispensary. If your Cannabis business is not compliant with GAAP principles and practices, you can’t reduce your taxable income with your Cost of Goods Sold. That is the only “deduction” a Cannabis business can take so ensuring compliance is crucial to long term business success.

IRC 280E:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

This regulation is the basis for how we operate in the cannabis space. Since Cannabis is a Schedule 1 controlled substance, this regulation restricts Cannabis companies from taking deductions and credits like traditional businesses. There are no loopholes to get around 280(e). as demonstrated by numerous tax court cases. We make sure our clients are in compliance with the tax code to avoid ending up in or losing in tax court thereby incurring huge fines, penalties and back taxes owed. We don’t want our clients to have pay over $300,000 in fines and penalties like Oliver vs Commissioner, one of the early cases that prudent professionals should have learned from. https://casetext.com/case/olive-v-commissioner-4

IRC 471:

The General Rule:

“Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.”

Since IRC 280E only lets Cannabis businesses take the Cost of Goods sold (through the use of inventory tracking), we apply the applicable provision(s) of IRC 471 to maximize the COGS. We read every tax court case to see what has been allowed and disallowed in audits. This research is used to help our Cannabis clients. It lets us know exactly where tax courts have leniency, the expenses they are allowing into inventory and the documentation they are required to justify positions taken. We can maximize this deduction while protecting our clients in the event or an audit. Inventory is a key part of compliance with this code. Different provisions of IRC 471 apply to different verticals.

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