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Cannabis Tax Compliance Strategies For 208E

Leverage Cost of Goods Sold • Apply Generally Accepted Accounting Principles

Posted February 23, 2025

Despite the IRS reaffirming 280E in 2024, cannabis operators can thrive with the right accounting methods, business structure, and proactive compliance. Uncle Sam's tax enforcement isn't known for leniency, so be strategic to keep your cannabis business profits protected from heavy taxation.

Get Answers To 3 Important Questions

Are your accounting practices structured to maximize deductions under 280E?
How can you utilize a multi-entity strategy to minimize your tax exposure?
Have you implemented proactive audit-preparation strategies to avoid costly penalties?

Is GAAP The Best Approach For Maximizing Your Eligible Deductions?

Under the 280E tax code, cannabis businesses cannot deduct common operational expenses like rent, payroll, or marketing. However, tax relief can be found by leveraging the Cost of Goods Sold (COGS) category. Using Generally Accepted Accounting Principles (GAAP) to standardize rules and procedures for recording and reporting financial information is highly recommended. By adopting a GAAP approach, cannabis businesses can allocate expenses such as direct labor, raw materials, and facility costs to COGS, significantly reducing taxable income.

Given the effective tax rate for cannabis businesses can range from 60% to 80% (compared to 21% for traditional industries), aligning with Section 471 of the tax code and tracking COGS effectively is a game-changer. Working with a CPA specializing in cannabis taxation can ensure compliance while optimizing these deductions.

Consider Splitting Your Business Operations To Minimize Tax Burden

How your cannabis business is structured can be a powerful tool for managing tax liability. A popular strategy is the multi-entity approach, which separates plant-touching from non-plant-touching operations. For example, real estate and equipment leasing companies can hold property and lease it to the cannabis business, allowing some expenses to be deducted outside of 280E.

It's critical to remember that this strategy requires legal guidance to ensure compliance. As seen in the 2021 Harborside Health Center case, missteps can lead to IRS scrutiny and hefty penalties. Proper structuring balances compliance with tax-saving strategies while minimizing risk.

Keep Clean Books Because IRS Audits Are Inevitable

The IRS is ramping up its audits of cannabis businesses, and in 2023, 80% of audited dispensaries had issues related to 280E (IRS Public Statements on Cannabis Business Taxation). Without proper preparation, businesses could face large tax liabilities, penalties, or legal repercussions. By staying ahead of potential audit risks, prepared businesses can reduce exposure to costly penalties and remain compliant as laws evolve.

3 Actions Successful Cannabis Operators Take

Keeping detailed financial records and tracking COGS and expenses.
Conducting internal audits to catch issues before they escalate.
Partnering with tax professionals who specialize in cannabis regulations.

Research Further To Reduce Your Tax Burden

The complex world of cannabis tax compliance doesn’t have to be daunting. With the right strategies, you can reduce your tax burden while setting your business up for sustained profitability.

3 New Taxation Insights Gained

Utilizing the GAAP approach allows for more deductions under COGS, potentially saving your business a significant amount in taxes.
Multi-entity structures can separate plant-touching and non-plant-touching operations, providing tax-saving opportunities.
Proactive audit preparation is essential to avoid IRS scrutiny, penalties, and potential legal issues.

5 More High-Value Questions Remain

Have you implemented a GAAP-based accounting approach to maximize COGS deductions?
How can you better structure your business to take advantage of multi-entity strategies?
Are you proactively tracking your finances and preparing for potential audits to avoid surprises?