26 U.S. Code § 280E – Frequently Asked Questions
Enacted in 1982 (14 years before California became the first state to legalize medical marijuana), Sec. 280E prohibits marijuana businesses from deducting their ordinary business expenses specifically because marijuana is listed under the Controlled Substances Act as a Schedule I narcotic. As a result, while voters in some states have legalized certain regulated marijuana sales, these businesses face exceedingly large tax bills because their business expenses are not deductible. This penalty is lessened in Colorado as the state specifically disavows Sec. 280E in calculating taxable income for state income tax purposes.
MJ Consulting Service is firstmost an advertising and marketing firm for the cannabis industry and as such we do not give legal nor accounting advice. Section 280E is a major pain point for most cannabis businesses particularly retail operations with no one addressing this issue from a reasonable standpoint. This except for wishing and hoping 280E will change or go away. MJ Consulting is a consulting firm whose goal is to help cannabis businesses make more money but also save on expenses. We are providing a possible solution to this 280E problem consistent with the CHAMPS tax court decision. However, we are not recommending this as a tax savings measure but rather our main thrust with the secondary business is to increase foot traffic in your store by offering additional services that are consistent with cannabis. This in the form of concert tickets and premium coffee. Cannabis businesses can save up to 45% on their taxes with this in place.
A relatively new industry in the United States involves the cultivation and sale of marijuana under newly enacted state laws. Twenty-four states and the District of Columbia have passed statutes permitting the medical use of marijuana, and four states—Alaska, Colorado, Oregon, and Washington—now permit, in regulated settings, the sale of marijuana for recreational use. However, the cultivation, sale and possession of marijuana remains illegal under the federal Controlled Substances Act and is classified as a Schedule I Narcotic.
According to the 1981 Edmondson Tax Court case the wording of Section 280E states: “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.” Marijuana currently is erroneously classified as a Schedule I narcotic which states that Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Until marijuana is reclassified as a Schedule III or lesser drug or 280E is repealed the tax consequences apply.
Sec. 280E penalizes legal distributors of controlled substances by denying deductions from gross income for business expenses. In effect you are taxed on 100% of your revenues. However, to preclude possible challenges on constitutional grounds, Sec. 280E does not prohibit adjustments to gross receipts for the cost of goods sold.
In a 2007 case, Californians Helping to Alleviate Medical Problems (CHAMP), the Tax Court allowed business deductions for the “patient care” portion of a medical marijuana dispensary in addition to the firm’s costs of goods sold. CHAMP was a not-for-profit entity under California law with a mission to provide caregiving services to members of the community with debilitating diseases. As such, business deductions under Sec. 162(a) for the caregiving portion of the business were permitted, and Sec. 280E would not prohibit these deductions “simply because the taxpayer was also involved in trafficking in a controlled substance.” The Tax Court further stated that the IRS regularly permits a taxpayer to engage in more than one business unless the separate characterization is artificial or unreasonable. This is why we set up an example entity “CannaTixx.com” This is a related business having its physical location the same as a cannabis business. It has separate expenses that are shared with an existing business which are all legally deductible.
Costs of Good Sold as related to production, manufacturing or processing includes:
Costs of goods do not include expenses generated from retail operations.
The way we set this up you can either do this for maximum profit and run this full time from your same location. Or we can set this up as a completely automated system that is hands free. In the first case you will need to have someone run the business pretty much full time and it could possibly exceed your current business in both revenue and net income. In the case of the automated system everything is handled by a third party for fulfillment and you make about 15% on internet sales.
For those cannabis operation owners that just don’t want to be involved in the Ticket Broker Business we are also offering an MJ Mike’s Coffee Shop ®™ franchise at a pre launch 50% savings. Talk to your MJ Consulting Services Representative today to see if this would be a fit for you.
We have seen other types of businesses used to help mitigate Section 280E such a a used car dealership associated with a farm and now a gas station/convenience store in Colorado. If you put in any other type of business you are going to have to invest a lot of time and money in the business to integrate it. Think of a sandwich shop, there are health licenses, equipment, food supplies and if it’s a Subway that costs you about $400-$500K just to open. The franchise fee alone is $25,000. The ticket business can integrate with a lot less costs and problems.
We set up a turnkey system for you. An online ticket brokerage which has as its physical storefront your current location. This can be run from anywhere with internet access and can be hands on or completely automated in which we have a third party manage the operation for you or you can run it yourself. You put a dedicated desktop or laptop in your building, hook it up to the internet and we train you or someone in your business how to do the ticket business. If you wish we can show you how to buy and sell event tickets and make this a service you can offer your current customers/clients. How many of your present customers toke up and go to concerts? Now you can provide “full service”. On the internet go to www.CannaTixx.com to see an example of this in action. That is the online brokerage but the physical location is your current business location. You can or cannot put up signage but we would recommend doing it particularly to legitimize the entity and for actual business. If a customer asks about concert tickets you can direct them to the internet or help them in your store to find and then sell them what they want. That’s up to you.
We are not advocating nor recommending to claim bogus deductions. This is a legitimate business which can generate real and substantial income and subsequently require resources to generate that income. Our recommendation is to have a full time functional ticket brokerage in your location, with all operations managed by a third party. This operation requires space along with other goods and assets to run and maintain. Some ticketing agencies generate over $1,000,000 a month in revenue and make a substantial profit. To do that requires an outlay of capital which can be written off from taxes as normal business expenses. Conversely, these normal business expenses generated in the cannabis business are being disallowed because of the nature of the business and section 280E. This system is put in place to help mitigate the egregious nature of 280E.
In 2012, the United States Tax Court assessed penalties and interest against Vapor Room Herbal Center, a California medical marijuana dispensary owned by Martin Olive, The Ninth Circuit agreed with the Tax Court that the Vapor Room’s only “trade or business” was the sale of marijuana. It noted that the test for determining if an activity is a “trade or business” is whether the activity was entered into with the intent of making a profit. As the Vapor Room’s other services were offered for free, the only activity that could raise a profit was the sale of marijuana. Olive v. Commissioner of Internal Revenue, No. 13-70510 (9th Cir. July 9, 2015). As stated previously, the ticket business can be very profitable and you are entering into this with the intent to make money. You are also providing other services to your customers to enhance your cannabis business. We believe the original CHAMPS decision will hold here.
It is a sound plan and not some frivolous attempt to not pay taxes. So we believe worst case scenario if it were ruled invalid by the tax court you wouldn’t be penalized. In that case you would just owe the taxes and interest. However, that would probably give you the opportunity to use your money for a few years possibly until the laws change and cannabis businesses are able to deduct normal expenses. If and when the law changes for 280E you would probably be able to file amended returns anyways going back 3-5 years. What this would do bottom line is allow you to keep more money now.
There are 4 different levels of this opportunity open now. The entry level costs $75/month and gives you a dedicated website with the physical location set to the address of your existing business. This is a completely automated system with all orders, fulfillment and customer service handled by a third party. What you do is put in a laptop or desktop in your location and hook it up to the internet. This handles the obligation that you are running the business out of your location.
Like with any kind of tax planning there is no guarantee it will work out. It is only guaranteed if it goes through the tax courts and is ruled in your favor. Any tax planning has to be based on sound principles and ours is. We will have case law and tax opinions in place. We are not operating this on some frivolous idea that has no basis for implementation. Our concept is unique and that is why we have the system protected by patent pending so that our competitors can’t come in copy it and benefit from our hard work.
The question should be can I afford not to do this and keep paying so much in taxes. To do the ticket business and be the most successful it is a full time operation for at least 1 person and preferably more. The basic automated system can be installed for $75/month. It is completely automated with all operations handled by a third party. The return and tax advantages are not as great as with a separate full time operation. The tax savings should amount to 10-15% with the entry level system.
16. I have a recreational store in Washington state can I do this here?
The founder of EZ-Ticket had done this from home by himself for 8 years putting in about 3 hours in the morning and 10-15 minutes here and there during the day and netted $10,000 a month. He was able to run errands during the day, go to the store and even see movies usually on Monday afternoons. This system can be run from a completely automated website without intervention but you probably won’t make anywhere near the $10,000 per month unless you can get more traffic to the website and store/dispensary. That would depend on marketing, SEO, advertising, social media presence and a whole gamut of things. MJ Consulting has a division to our business to help with increasing web traffic for websites. Marketing expenses for your cannabis business are not deductible but they would be for your ticket brokerage. The managed system is our upscaled package and would be $40,000 plus a monthly management fee taken from proceeds of sales. The managed system requires a minimum commitment for inventory of $40,000 plus $5,000-$10,000 per month management fees. Some ticket brokers do over $250,000 per month but there is no guarantee of that because of the nature of the business.
Currently because of the nature of the backend ordering and fulfillment with the entry level system there is no exclusivity at this time. In addition if you simply purchase the website/plugin we do not restrict where you put your operation. However, the franchise opportunity is limited to geographical locations and gives the franchise owner exclusivity to his area. Because of the newness of this opportunity at this time most locations are still available. In addition the managed system will only be available for a select few clients due to complexity and logistics.
First, there is no guarantee that the law will change but it probably will change in the next 3-5 years and probably not before the 2016 elections. This is a band-aid for your business to allow you to keep and use more of your money now. If and when the law is changed by Congress, marijuana businesses will probably be able to go back and file amended tax returns for those years. The key to that is to make sure that all your records and deductions are meticulous for the IRS won’t allow deductions just because you say you had expenses. They will need to be documented. There is no guarantee but this system should allow you to keep 10-50% more on your taxes now.
$40,000 is for the top tier and is a lot of money. This is not for everyone. What you should ask is how much can this save me in taxes? Primarily this system when implemented properly is designed to save you 10-50% on taxes. If you are paying over $100,000 in taxes a year the savings could pay for itself in the first year alone. As mentioned there are 4 levels of the ticket broker business we are offering.
As with any business there is no guarantee that this can or will be profitable. However, it has been profitable for others and we have designed the system to work for anyone that follows the recommendations. The managed system is the option with the most chance of success.
A ticket scalper is the guy that stands out in front of a venue trying to avoid authorities and sells tickets. The tickets maybe stolen, counterfeit or voided. There is no guarantee they are legitimate. Usually municipalities have some type of ordinance prohibiting this. You would be operating as a licensed ticket broker from a permanent location and the internet. The service you provide is that you supply tickets to usually sold out or hard to obtain events. Granted, you try to sell for more than the original cost of the ticket and people don’t have to buy the tickets. They can buy nose bleed sections. You are already in a business that has a lot of negative feedback from a segment of the community. With that you are providing a service that people want and possibly need if in MMJ.
Whoever told you that is wrong and they probably told you not to get in the cannabis business in the first place or by that thinking should have. First of all, the ticket business is perfectly legal. You would be licensed to do that. You are operating as a separate business in the same location as your marijuana business. Your cannabis business is an illegal activity under federal guidelines and if you employ anyone, that is subject to RICO guidelines as an organized activity. You are not funneling money from your cannabis business into this. That would be money laundering. You are running a legitimate and separate business which generates expenses. If for some reason in the future your cannabis business were to be shut down because it is an illegal business you could keep doing the ticket business because it is perfectly legal. If it does not generate a profit you have 5 years to do so otherwise the IRS can claim it is a hobby and disallow the expenses, but we expect 280E to change by then.
According to the IRS Publication from 18.104.22.168 (11-01-2004)
Transactions between controlled taxpayers which may involve an IRC section 482 issue include the following:
IRC section 482 places a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining true taxable income. Since none of these are relevant to the two or possibly three entities involved in the cannabis business since all of these entities operate at arms length of each other, these should not have bearing on this tax situation.