24 Aug IRS 280E AND PAYROLL – HOW TO LOWER THE TAX BITE & KEEP YOUR EMPLOYEES HAPPY
IRS 280E is very specific about taking deductions for cannabis retailers. All expenses except cost of goods sold are off the table for cannabis retailers, consequently payroll, usually a substantial part of the income statement, is not deductible.
Does that mean that my dispensary agents, security guard, manager, and any other person who works there is costing me 1.5 to 2x their real pay? The answer is yes unless you take some affirmative steps to stop the flow of red ink.
My suggestion – creating a separate company that operates under the same roof as the dispensary. The IRS has acknowledged that two or more businesses can occupy the same real estate, and share many of the same resources. Why not have your dispensary move some of the costs into the other business?
Let’s take a look at an example. Why not offer additional health related services through a different company? For example, in your dispensary offer some sort of holistic healing, drug and nutrition counseling, etc. This business can then hire your dispensary employees for certain tasks, pay them, and reduce the money you can’t recover for any payroll deductions due to 280E.
Let’s say your dispensary agents earn $20 per hour. Why not pay them the minimum wage, then have them doing part time work as drug counselors, patient education counselors, etc. at $70 per hour (or what ever number will bring them to their weekly wage)? This would turn a $800 per week employee who’s pay is not deductible into a potential $7.25 an hour dispensary employee (this is the lowest state minimum wage which ranges from $7.25 to a high of $11.50 in DC) being paid $290 per week. The additional money would be paid from the other business tied to the dispensary location. For example, someone counseling a patient on drug education or the benefits of different strains of marijuana could be paid $50 per hour to make up the difference. All of this money paid out from the ancillary business would be deductible.
One caveat – it has to be a real operation. The IRS will sniff out the fraud if you decide simply to open a shell company simply to write paychecks to avoid taxes. Give the employees real work, real job descriptions, and keep meticulous records of their activities, patients seen, and training provided to them to substantiate a raised level of pay.