Updated: Aug 29, 2022
The cannabis industry is one of the fastest-growing industries in the United States. According to a report by Arcview Market Research, the legal cannabis industry is expected to grow from $6.6 billion in 2016 to $46.8 billion by 2025.
However, the federal government’s classification of cannabis as a Schedule I drug puts significant restrictions on the industry. One of the most significant of these restrictions is Internal Revenue Code Section 280e. Essentially, Section 280e disallows cannabis companies from deducting most business expenses from their taxes. This means that cannabis companies are taxed at a much higher rate than other businesses.
In this article, we’ll discuss how Section 280e impacts cannabis companies and what you can do about it.
What Does Schedule I Mean?
Schedule I drugs are those that have been determined to have a high potential for abuse and no accepted medical use. Examples of Schedule I drugs include heroin, LSD, and ecstasy. These drugs are considered to be the most dangerous and are tightly regulated by the government.
However, cannabis is also listed as Schedule I in the United States, meaning that it too is considered to have a high potential for abuse and no accepted medical use. This classification has been controversial ever since it was first enacted in 1970, and there have been many efforts to change it. So why is cannabis a schedule I drug?
Some people argue that cannabis does have proven medical uses and that it should be reclassified as a schedule II or III drug. Others say that the potential for abuse is not as high as other schedule I drugs like heroin or LSD. Ultimately, the decision on whether to keep cannabis as a schedule I drug is up to the federal government, and it does not seem likely that the classification will change anytime soon.
What is IRS Code 280e?
IRS Code 280e is a section of the US tax code that prohibits businesses from deducting expenses related to the sale of illegal drugs. This includes costs like advertising, rent, and employee salaries. The purpose of this code is to discourage drug trafficking by making it more difficult for illegal drug dealers to operate.
Code 280e was enacted in 1982 in response to the growing problem of drug trafficking in the United States. Since then, it has been a controversial provision of the tax code, with some arguing that it unfairly targets legal businesses that sell marijuana and other drugs. Others argue that it is an essential tool in the fight against illegal drug trafficking.
This has especially become an issue since states first began legalizing recreational cannabis in the last decade. Currently, the Internal Revenue Code 280E specifically prohibits any business from deducting "any amount for expenses incurred in carrying on any trade or business" if the trade or business "consists of trafficking in controlled substances...which is prohibited by Federal law."
Because marijuana is still classified as a Schedule I drug under the Controlled Substances Act, businesses that sell it cannot deduct their business expenses from their taxes. This often puts them at a disadvantage compared to other businesses, who can deduct their expenses. Some have argued that this unfair tax treatment creates a financial incentive for drug dealers to stay involved in the illegal market, rather than switch to the legal market.
In recent years, however, some have argued that 280E disproportionately impacts legal marijuana businesses, which are already struggling because they are constricted from selling across state borders and have highly taxed and regulated businesses with a great deal of overhead.
How does 280e impede cannabis companies from marketing their products?
There are a number of specific ways that 280E impedes cannabis companies from marketing their products. For one, it prohibits them from deducting advertising expenses, which can be a significant cost for businesses. Additionally, it limits their ability to sponsor events and engage in other forms of marketing that would be beneficial for their business. As a result of these restrictions, cannabis companies often have to get creative in the ways they market their products.
Katye Maxon Landis, a cannabis accountant with Indiva Advisors, has said that she advises her cannabis clients to do their best to limit any expense that isn’t inventory related, since inventory is the only expense they can legally deduct.
Businesses subject to Sec. 280E should look to Sec. 471 to determine the proper inventory capitalization and valuation methods, allocation of expenses, and their impact on cost of goods sold.
This obviously makes it very difficult to enact and carry out an effective marketing and branding strategy as a cannabis company, since most marketing efforts are going to require an meaningful investment, and unlike most other businesses, you aren’t able to use marketing costs as a tax right off. This is one of the primary reasons why cannabis marketing is not developing along with other aspects of the industry.
Other Challenges Facing Cannabis Companies Marketing Their Products
As the cannabis industry continues to grow, so do the challenges faced by companies marketing their products. In addition to the restrictions placed on advertising by the federal government, cannabis companies must also navigate a complex web of state and local laws.
Compliance is always a top concern for any business, but it is especially crucial for cannabis companies. A misstep in advertising could result in a fine or even a license revocation. Given the high stakes, it is essential that cannabis companies work with experienced marketing partners who can help them navigate the ever-changing landscape.
In addition to the compliance challenges, cannabis companies also face the same marketing challenges as any other business. They must find ways to stand out in a crowded marketplace and reach their target consumers. However, the unique nature of the cannabis industry presents its own set of challenges. For example, many social media platforms
How Cannabis Companies Can Mitigate The Impact Of 280e On Their Business
280e is a significant hurdle for cannabis companies in what is already a highly competitive industry. It has been shown that 280e can raise a company's tax bill by 30% or more. This makes it extremely difficult for cannabis companies to survive.
There are a few ways that cannabis companies can mitigate the impact of 280e on their business. One way is to carefully track all of your expenses and allocate them accordingly. This includes everything from office supplies and rent to employee salaries and marketing costs. One of the biggest benefits of tracking your expenses is that it can help you save money. By knowing where your money is going, you can make adjustments to your budget and cut out unnecessary expenses. This can free up more money to reinvest in your business and help it grow. If you're not already tracking your company's expenses, now is the time to start.
Another factor that must be considered is your business structure. Your business structure has a big impact on your tax liability. For example, sole proprietorships have the lowest tax liability, while S-Corporations have the highest. This is because sole proprietorships are taxed as personal income, while S-Corporations are taxed as business income. Of course, there are many other factors that go into determining your tax liability, such as the type of business you have, your location, and your revenue. But your business structure is one of the most important factors. So if you're looking to lower your taxes, it's worth considering how your business is structured.
Remember, while the impact of 280e is significant, it doesn't have to be fatal for cannabis companies. While it’s unfair that legal cannabis companies are taxed so heavily, it’s a level playing field within the industry, so all of your competitors are facing the same obstacles. The best advice I can give any prospective cannabis entrepreneur is to create an extremely conservative business plan that make your branding and marketing a priority. That way you’ll be able to outpace the competition in boom times and in bust.
Marketing Tips For Cannabis Companies In 2022
As the legal landscape surrounding cannabis continues to evolve, so does the marketing landscape. What worked for cannabis companies a few years ago may not work today - and what works today may not work a few years from now.
That's why it's important for cannabis companies to stay ahead of the curve and always be on the lookout for new and innovative marketing strategies, especially in light of the restrictions caused by 280e. Here are a few marketing tips for cannabis companies in 2022:
Get involved with digital marketing. Cannabis companies should focus on building a strong online presence and creating digital marketing campaigns that target their audience.
Get creative with your marketing. With so many restrictions on cannabis advertising, it's important to get creative with your marketing campaigns. Think outside the box and come up with campaigns that will grab attention and get people talking.
Use targeted marketing strategies to reach your ideal customer.
Create engaging and informative content that educates your audience about cannabis.
Use social media platforms to connect with your customers and build relationships.
Stay up to date with the latest industry trends and changes.
Keep your marketing efforts compliant with state and local laws.
And perhaps the best thing you can do is work with a branding and marketing agency that specializes in the cannabis industry.
Partner With The Hood Collective For Your Cannabis Marketing
The bottom line is that IRS code 280e prevents cannabis companies from deducting their marketing expenses from their taxes. As a result, these companies have to spend more on marketing to reach the same level of exposure as their competitors in other industries. This puts cannabis companies at a disadvantage, but there are ways to overcome this obstacle.
Working with a cannabis marketing agency that understands the unique challenges posed by 280e can help to level the playing field. The Hood Collective is proud to partner with cannabis companies of all sizes on your content marketing needs, including web design, logo design and branding, social media management, photography, video, drone, and SEO.
Contact us today to schedule a free consultation.