The Sixteenth Amendment of the U.S. Constitution prohibits the Federal government from taxing “gross receipts”. While I.R.C. §280E disallows cannabis businesses to deduct “ordinary and necessary” business expenses, it would be unconstitutional for the IRS to disallow businesses to deduct Cost Of Goods Sold when calculating gross income. This concept was first applied in the Tax Court case of Olive vs. Commissioner Of Internal Revenue, 139 T.C. 19 (2012).
Check out the following example of a cannabis business with monthly gross receipts of $100,000 ($1,200,000 annually):
| With No Tax Planning | With Tax Planning | |
| Gross receipts | $1,200,000 | $1,200,000 |
| Cost Of Goods Sold | -0- | $780,000 |
| Gross Profit | $1,200,000 | $420,000 |
| Taxes at 35% on Gross Profit | $420,000 | $147,000 |
| Ordinary And Necessary Business Expenses | $900,000 | $120,000 |
| Your Net Profit <Loss> | <$120,000> | $153,000 |
You can see how important it is that the business be able to capitalize as much of these expenses into inventory which will show a higher Cost Of Goods Sold and hence lower taxes which equates to higher profits. Of course the IRS will see things differently as they typically do in any audit. Don’t let your cannabis business be a statistic.
Having access to a Board Certified Tax Attorney-CPA with specialized knowledge in the cannabis industry and more than 30 years of experience in advising businesses in tax compliance and planning, accounting systems and cash management can help you meet your challenges to minimize your taxes and conduct business in a manner that avoids prosecution by the Federal authorities and meets State & Local laws and regulations to ensure your cannabis business remains operational. Don’t delay call us today!
