By Luigi Zamarra, CPA

Are you a distributor or retailer of cannabis products? If so, you incur lots of expenses that could be deemed subject to Section 280E of the federal tax code: all of your sales, advertising and delivery costs. One of the largest categories of these expenses is wages & salaries.

CHOOSING YOUR COMPANY’S LEGAL ENTITY

Although there are many legal considerations when choosing the right type of legal entity for your business, one consideration that is often overlooked is Section 280E. Corporations, including S corporations, are required to pay reasonable salaries to owners and officers working in the business. By “reasonable” in this context we mean a certain minimum salary amount. This requirement is due to Social Security tax issues that are beyond the scope of this article. The point is that owners must draw a salary and if that owner is involved in selling, marketing and/or delivery, then these salaries are subject to disallowance under 280E.

IS A LIMITED LIABILITY COMPANY RIGHT FOR MY BUSINESS?

A Limited Liability Company is different in this regard. There is no requirement to pay a salary to the business owner who works the business. Instead the net profit of the business is the income reported by the owner. (This applies to both single-member LLCs as well as to multi-member LLCs that are taxed like partnerships.) When owners report net income rather than salary, then they have no salary expense to be disallowed under Section 280E.

CONSULT YOUR CPA

Note that this benefit does not have to be limited only to the founder-LLC member. It is possible, with proper advice and planning, to create an LLC structure whereby all of the workers get treated as LLC members. Such a structure could substantially reduce your 280E expenses and give you the competitive advantage you need to succeed.

Want to learn how to navigate the complex tax & legal landscape of the growing cannabis industry? 
Join us for NCIA’s first Cannabis Tax And Law Symposium on January 21-22, 2015 in San Diego, CA, offering CPE and/or MCLE credits to attorneys or accountants that attend to learn more about these important topics! Register today.

Luigi Zamarra, CPA, has been a member of NCIA since 2013. Luigi CPA is an accounting firm located in Oakland, CA, that helps all types of businesses and individuals with tax planning, tax compliance, and tax dispute services. Luigi specializes in the medical marijuana industry. He helps these businesses comply with IRC Section 280E so as to balance tax cost against audit examination risk.

*Disclaimer: NCIA does not provide legal or financial services or advice. Any views or opinions presented in this guest blog post are solely those of the author and do not necessarily represent those of the organization. You must not rely on the legal information on our website as an alternative to legal or financial advice from your lawyer or other professional services provider.