The cannabis industry has been growing exponentially, with more states legalizing medical and recreational marijuana use every year. However, current federal tax policy still prohibits cannabis businesses from taking advantage of crucial deductions available to other traditional markets due to the Internal Revenue Service (IRS) code known as 280E.
Recently, Illinois lawmakers have approved a budget bill that includes provisions allowing licensed marijuana businesses to take state tax deductions despite this limitation, providing much-needed relief for the industry in the state.
Overview of 280E and Its Impact on Cannabis Businesses
Section 280E of the Internal Revenue Service (IRS) code says that businesses trafficking in controlled substances cannot take any tax deductions or credits from their gross income. For cannabis businesses, this means they are unable to deduct everyday business expenses such as rent, payroll costs, advertising expenses, and more.
This significantly increases the effective tax rate of cannabis businesses compared to other traditional markets, putting them at a severe disadvantage in terms of profitability. Fortunately, Illinois has recently passed legislation that allows licensed marijuana businesses to take state tax deductions despite the limitation imposed by 280E. While this is a positive step forward for the industry in the state, further changes will need to be made to the federal tax policy in order for cannabis businesses to fully benefit.
Details of Illinois budget bill allowing cannabis businesses to take state tax deductions
Section 280E of the Internal Revenue Service (IRS) code states that businesses trafficking in controlled substances are not allowed to take any tax deductions or credits from their gross income.
This exponentially increases the effective tax rate of cannabis businesses compared to other traditional industries, putting them at an extreme disadvantage in terms of profitability. Fortunately, Illinois has recently passed legislation that allows licensed marijuana businesses to take state tax deductions despite the limitation imposed by 280E.
While this is a positive step forward for the industry in the state, further changes will need to be made to the federal tax policy in order for cannabis businesses to fully benefit.
Details of Illinois Budget Bill Allowing Cannabis Businesses to Take State Tax Deductions
The recently approved Illinois budget bill includes a provision allowing licensed marijuana businesses operating in the state to make deductions on their taxes, even though they are prohibited from making those same deductions at the federal level due to 280E.
Specifically, an amount equal to the deductions disallowed under Section 280E of the Internal Revenue Code for the taxable year will be added as a deduction from gross income for Illinois cannabis business taxpayers filing their returns with the state. This will help businesses in the state significantly reduce their tax burden and make them more competitive compared to traditional markets that already take advantage of deductions under 280E.
The recently approved Illinois budget bill allowing licensed marijuana businesses to make deductions on their taxes joins New Jersey as the most recent state to have solutions in place to help cannabis business owners struggling under 280E’s restrictions at the federal level.
By deducting expenses related to normal business operations, cannabis companies can save money and increase profits, thereby increasing their competitiveness with traditional markets that can already take advantage of deductions under 280E.
Moreover, this legislative change also serves as a testament to how state governments are outstripping the Federal government regarding sensible policy surrounding the cannabis industry. As more states continue passing similar bills or have similar bills in the works for a workaround 280E, small farms will have a fighting chance at survival in this ever-evolving industry.
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