280E: The Silent Killer of Small Cannabis Businesses
IRS Code 280E is the four-digit nightmare haunting cannabis business owners everywhere. Think of it like a financial vampire, slowly draining the lifeblood of your profits—all while payroll providers sit back and pretend it’s not their problem.
Here’s the thing: 280E isn’t just another pesky tax rule. It’s a relic of the war on drugs, created to punish illegal drug traffickers by denying them typical business deductions. But because cannabis remains illegal at the federal level, even legal businesses are stuck footing the bill.
The result? Sky-high effective tax rates, razor-thin margins, and businesses scrambling to stay afloat. And while many payroll providers tout themselves as cannabis-friendly, they’re not doing nearly enough to help you navigate these murky waters.
Let’s unpack exactly how 280E impacts payroll, why your current provider might be part of the problem, and what steps you can take to protect your business.
How 280E Bleeds Your Bottom Line
To understand why 280E is such a killer, you need to know how it works.
No Deductions for Ordinary Business Expenses
Under 280E, cannabis businesses can’t deduct most of their operating expenses—things like rent, marketing, and yes, payroll. While other industries get to write off these costs and reduce their taxable income, cannabis businesses don’t.
Inflated Effective Tax Rates
Without those deductions, your taxable income looks artificially high. This means you’re paying taxes on money that isn’t really profit. For many cannabis businesses, this results in effective tax rates of 60%, 70%, or even higher.
Cash Flow Crunch
High taxes and limited deductions create a brutal cash flow problem. Businesses end up funneling most of their revenue into tax payments, leaving little left for payroll, growth, or emergencies.
Why Payroll Providers Are Failing Cannabis Businesses
If you’re thinking, “Isn’t my payroll provider supposed to help with this?”—you’re not alone. The harsh truth is that many payroll providers simply aren’t equipped to handle the unique challenges cannabis businesses face.
1. Lack of 280E Expertise
Most traditional payroll providers don’t understand 280E or how it impacts payroll. They offer generic solutions that might work for other industries but leave cannabis businesses struggling to manage cash flow and compliance.
2. Poor Cash Payroll Support
With limited access to banking, many cannabis businesses rely heavily on cash payroll. Yet, few providers offer robust support for managing cash payments, tracking deductions, and ensuring compliance.
3. Inadequate Compliance Monitoring
Cannabis regulations are constantly changing. Payroll providers that don’t stay on top of these changes put your business at risk of fines, audits, and worse.
What Your Payroll Provider Should Be Doing (But Probably Isn’t)
Here’s what a truly cannabis-savvy payroll provider would offer:
280E-Compliant Payroll Solutions
A good provider should help you structure payroll in a way that maximizes what little tax relief is available. This includes correctly classifying employees and tracking which activities might qualify for limited deductions.
Cash Payroll Management
Handling cash isn’t easy, but it’s a reality in cannabis. Your provider should offer systems for tracking cash payments, generating detailed reports, and ensuring everything is above board.
Proactive Compliance Updates
Staying compliant means staying informed. A top-notch provider will keep you updated on regulatory changes and help you adapt your payroll practices accordingly.
Practical Steps to Minimize 280E’s Impact
You can’t eliminate 280E, but you can minimize its impact. Here’s how:
1. Separate Cost of Goods Sold (COGS) Expenses
While 280E disallows most deductions, you can still deduct expenses directly related to producing your product. Work with an accountant to ensure you’re maximizing these deductions.
2. Optimize Employee Classification
Properly classifying employees can help reduce your tax burden. For example, employees involved in production activities may be tied to COGS, making their payroll deductible.
3. Improve Cash Flow Management
High taxes mean tight cash flow. Use tools and strategies to better manage cash inflows and outflows, ensuring you have enough on hand for payroll and other critical expenses.
The Future of 280E: Will Relief Ever Come?
There’s a glimmer of hope on the horizon. As more states legalize cannabis and public support grows, there’s increasing pressure on Congress to reform 280E. Several bills have been introduced that would allow legal cannabis businesses to take standard deductions, but until federal legalization happens, 280E remains a harsh reality.
In the meantime, the best thing you can do is work with providers and advisors who understand the industry and can help you navigate these challenges.
Conclusion: Don’t Let 280E Sink Your Business
IRS Code 280E isn’t going away anytime soon, but that doesn’t mean your business has to suffer. By understanding how 280E impacts payroll, choosing the right providers, and taking proactive steps to manage cash flow, you can keep your business afloat and even thrive.
Paragon Payroll specializes in helping cannabis businesses navigate 280E and other industry-specific challenges. From cash payroll solutions to compliance support, we’ve got your back.
Ready to take control of your payroll?
Your Next Move: Beat 280E at Its Own Game
-
Find a Payroll Partner Who Gets It: Our primary goal is for you to find a provider who truly understands 280E and the unique challenges of the cannabis industry. What matters most is choosing a partner you trust and feel aligns well with your needs. If it happens to be us that you are curious about engaging with; please feel free to reach out to us. We'd be happy to talk with you and help you figure out your next steps.
-
Maximize COGS Deductions: Ensure you’re properly separating deductible expenses.
-
Stay Compliant: Keep up with regulatory changes and adjust your payroll practices accordingly.
