Tax expert and a leader in shaping the financing and structures of legal cannabis companies, John Magliana talks about the practical aspects of dealing with the 280E tax code section, which has huge impact on the operation and success of those involved in the legal industry.

In particular, John emphasizes setting up your company - whether grower, processor or dispenser - properly.  Doing it correctly in the beginning can save an owner tons of money in the long run.  Also, great record keeping not only helps any business run better, it is especially important to a cannabis company for credibility when challenged by the IRS.

Section 280E, Internal Revenue Code, if you “traffic” in illegal substances, normal business expenses are not allowed.
It is a gateway issue: If you get audited by IRS, they get an in-depth look at your business.  Then info can spread to state level and if inventory or other issues appear, there is potential liability.
Stems from a drug dealer case where the dealer was able to write off certain business expenses after being caught.  So congress passed 280E to blunt the trend.
Key is cost of goods sold, because that is a write-off.
Very difficult for a dispensary because direct cost of goods sold not necessarily written off, such as labor.  But for a grower it’s different, because labor is involved in growing the plant.  Very sticky.
SAD, John’s acronym.  S: Segregate what is trafficking and what is not.  A: Allocation of cost of goods sold.  D: Diversify your stream of income to show you are not solely a trafficker. 
Get set up correctly to begin: You could be paying an 85% tax rate while your competitor is paying 35%, just because they have set up the accounting correctly.
One technique: Set up an employee leasing company, make it a profit center and when you can allocate their labor to direct cost of goods sold, you can get the write-off.
Murky: When employee is selling T-shirts, pipes and so forth, they are not trafficking.  However, when they sell product, they are involved in trafficking.  Set up the store so there is a separate location between product and non-product items.  So allocate the employee’s time between the two.
Practical Key: Have clean, good records because when there is a dispute, the auditors will view good records as credibility and more likely to believe the write-off assertions.
There is a good side to 280E: The industry is only going to grow and be respected if the bar to operations is kept high.  It screens out the unprofessionals that are the root of the bad stigma.
The best thing to happen to the industry is rec.  Why? Because anyone who wants to do business legitimately, they need to get a license, they must pay taxes and there will be pressure on the mavericks to pay their fair share.
Also, with investors looking to get into the industry, 280E disclosures need to be up to date and accurate or investors will have recourse.  This helps keep the industry clean.
Be careful of pass-through company structures (LLCs, Sub Ss), as IRS can go after personal income taxes.  Being a C corp makes it easier because the company is potentially liable, not the individuals.
Always file a non-fraudulent return, then the clock starts on statutes.  Keep returns for six years.
Keep all transactions transparent to your bank.  Allow them to check on daily sales if they want.
Use a company credit card for everything you do.  Receipt and description.
Nevada good state to register IP for larger companies.  No state income tax.
Will there be a follow up to 280E?  If marijuana is taken off schedule 1 AND 2, 280E will not apply.  Other “fixes” would be to say 280E does not apply if company is in compliance with STATE laws.

S1 E12 John Magliana - The BIG Tax Boogie: 280E

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