24 Aug How to Deduct All of your Dispensary Rent under IRS 280E
One of the more significant expenses in the retail cannabis business is the rent. According to IRS 280E, if you’re selling it retail, then there is no deduction for rent expense except for the space that is actually used for non-retailing activities such as drug counseling, nutrition classes, etc. This must be set up with a full set of books, and if it isn’t yet, start now. If there is no other business in the dispensary space, you need to start one – something legitimate with income and expenses.
Unfortunately, there is still space requirements for a place to put your point of sale systems, your inventory, counter space, etc. If you’re a dispensary, then you probably having been trying to minimize the retail cannabis footprint in order to minimize the loss of the deduction for rent.
Is there a solution? First, remember the most important rule of the jungle “tax evasion–intentional conduct to defeat the income tax laws–is a felony.” Notice – the law concerns tax EVASION, not tax AVOIDANCE. So, armed with this knowledge let’s construct a tax shelter for rent.
Let’s look at the numbers. For illustration purposes, let’s work with a 2,000 sq. ft. facility that pays $2,000 rent a month. In a much written about case, Californians Helping to Alleviate Medical Problems (CHAMP), the Tax Court allowed business deductions for the “patient care” portion of a medical marijuana dispensary in addition to the firm’s costs of goods sold.
So, what we need are two separate businesses with two distinctly documented set of books. The quality and quantity of your documentation is what will save your wallet from the IRS, so collect every receipt, document every sale, and be able to show where every penny is spent and how it is collected.
In the above facility, let’s say that half is used for the dispensary, and the other half is used for non-cannabis retail purposes, such as rooms where patients are counseled, nutrition classes are held, etc. All of these activities are organized under a non-cannabis retailing corporation, so the half that the sister company pays is deductible under federal tax law.
Now, we have a $1,000 a month deduction we currently can’t use because it’s dedicated to cannabis sales. How do we make it up? In order to neutralize the sting, we have two options – find another way to deduct the $1,000, or even better find another way to make another $1,000 a month outside the retail cannabis business. How can we deduct a rent payment for a cannabis business when it is clearly outlawed under IRS 280E?
Step 1. Set up a management company (under an LLC). Ask the landlord to change the lease to the management company, so the check for the lease actually comes from the company.
Step 2. Sign a lease between the management company and the dispensary. The other business (who also has a signed lease) in with the dispensary (the patient care one discussed above) should now be charged a higher market rent. So, the (sub)lease with the patient care facility should be charged $1,500 per month (it must be a justifiable number based on market traffic).
Step 3. The dispensary is now paying $500 per month in rent, but there is still room for savings. The rooms mentioned above should be rentable on an hourly basis for groups that need meeting space. Make sure you use social media to highlight the point that you have rooms for rent for health related meetings within a dispensary. If you can pull in $500 per month payable to the management company, you’ve now covered the rent and netted out the money to cover it.
Step 4. One of the other ways to reduce the lack of a rent deduction is by “renting” the address as a mail drop. Many people would prefer certain mail come to a P.O. Box, so if you’re charging a small monthly fee to collect mail and allow the use of your address, it could result in the space turning a profit for the management company. Check local laws to insure compliance with any regulations that may exist concerning mail drops.
Get creative – but check the law before you enter into any deals or agreements, or reconfigure the space. REMEMBER – there is *never* enough documentation or paper trail when it comes to the IRS.