This document provides an overview of different business structures and tax considerations for cannabis businesses. It emphasizes that corporate structure is important for protection from lawsuits and taxes. A common strategy discussed is having two LLCs and a C-Corp, with one LLC holding the cannabis license, another LLC acting as a management company, and the C-Corp owning shares in the management company. This allows marking up costs charged between the companies to increase the cannabis business's cost of goods sold deduction under Section 280E, which disallows other business expense deductions for cannabis companies. Proper record keeping and cost accounting is crucial for surviving an IRS audit on cannabis tax filings.

1. Optimized Business Structures:
Non-Profit, For-Profit & 280e
BOB CARP, ESQ.
RCARP@POST.HARVARD.EDU

2. SETTING UP SAFELY
Whether for-profit or non-profit, following key rules
protects you from:
- Personal lawsuits
- Damages
- The IRS
- Other government agencies

3. Corporate Structure is Your First Defense
A. IF DONE INCORRECTLY, IT COULD COST YOU
EVERYTHING INCLUDING THE ROOF OVER
YOUR HEAD.
B. DO NOT USE A BOILERPLATE INCORPORATION
KIT OR DOWNLOAD SOMEONE ELSE’S BYLAWS
C. One size does not fit all

4. Corporate Structure is Your First Defense (con’t)
Issues to worry about:
-Indemnification
-Asset protection
-Personal protection
-Taxes, lawsuits, confiscation of property, arrest

5. Observe Corporate Formalities
#1. Buy corporate kit
- Not for stock certificates (non-profits
don’t have stock)
- Mainly for corporate minutes &
bylaws register

6. Reducing the Tax Bite
REMEMBER: COGS and proper classifying of expenses

7. HOW YOU’RE GOING TO GET A
LUNCH DATE WITH THE IRS
- Don’t mix money without IOUs
- Don’t use bank account for personal bills
- Don’t write checks w/o corresponding invoice
- Don’t link bank accounts!
- If you have multiple companies, write checks to
each other and keep a ledger

8. Cost of Goods Sold – Make it Bulletproof
Dealing with the dreaded 280e
The Two-Business Rule
Taxpayer can have more than one trade or business
Alverson v. Commissioner
Regulations provide standards to determine whether
activities constitute separate businesses
Reg. § 1.183–1(d)(1) 42

9. Cost of Goods Sold (con’t)
Full Absorption Inventory Cost Method Section 471
Taxpayer’s must include as inventoriable costs all
direct and indirect production costs. Continuing
under Section 263A, UNICAP rules require producer
of inventory to include in the costs of its inventory
direct costs of such property’s proper share of those
indirect costs part or all of which are allocable to
such property.

10. Let’s Stick to the Easy Ones
To create more justifiable expenses & solid audit trail:
A. Dispensary employees should dispense for free, but
educate for a salary
B. Dispensaries should have another method of costing
C. Every employee should have non-marijuana related
job description along with real job duties
D. Any non-COGS expense should be reworked and
reclassified

11. WHY DO YOU NEED TWO
LLC’S AND A C CORP?
A. One entity is the actual cannabis enterprise holding the
license.
B. The other entity is the management company providing
goods and services to the cannabis enterprise.
C. Management company marks up the goods & services,
creating a higher COGS
D. The third is to hold the share of the management company.
E. Look up: Sec. 1202 Small Business Stock Capital Gains
Exclusion

12. The Two-Business Rule
qCAUTION: It must be a legitimate
business to claim the deductions, i.e. it
should have its own set of books, its
own corporate structure, and a real
revenue/expense stream

13. CORPORATE STRUCTURE
WHICH ONE IS BEST?
a. Operate as an Individual
b. Partnership
c. S Corporation
d. LLC
e. C Corp
f. S Corp

14. The Tax Dilemma – 280E
Last year, 44% of cannabis-based companies went
out of business
Most frequent reason?
280E

15. 280E Defined
- Involves expenditures in connection with the
illegal sale of drugs
- No deduction or credit shall be allowed…in
carrying on any trade or business if such trade or
business (or the activities which comprise such
trade or business) consists of trafficking in
controlled substances.
- THAT’S THE WHOLE STATUTE!

16. 280E Defined (cont’d)
• Cannabis is considered a Schedule 1 drug
• This means no medical use
• Considered as dangerous as heroin
In a nutshell: NO BUSINESS DEDUCTIONS
ARE ALLOWED ON YOUR TAXES!

17. WHICH CANNABIS BUSINESSES
ARE HIT THE HARDEST BY 280E?
“IF YOU TOUCH THE FLOWER, THE GOVERNMENT HAS THE
POWER!”
Dispensaries – hardest hit by 280E.
Growers – Not as bad, they can attribute almost everything to COGS
Edibles/MIPS – Deceiving – you think that the sugar, flower, ingredients, etc.
are expenses BUT THEY ARE NOT. (“or the activities which comprise such
trade or business”) as stated in 280E means you have to capitalize them
and not expense them.
Testing Labs – no worries. They are not “trafficking” in cannabis.

18. EXAMPLE
Normal Business:
Income: $1,000,000
Cost of Goods Sold: $500,000
Rent: $100,000
Payroll: $100,000
Administrative Expenses: $100,000
Expected net income before taxes: $200,000

19. EXAMPLE (CONT’D)
Marijuana business
Income: $1,000,000
Cost of Goods Sold: $500,000
Rent: $100,000
Payroll: $100,000
Administrative Expenses: $100,000
Expected net income before taxes: $200,000,
right?

20. WRONG!
- You can’t deduct ANY of the ordinary expenses of
carrying on a business, like rent, payroll, etc.
- Taxes would be based on net income of $500K
instead of $200K = higher tax burden

21. IN SUM….
Worried? You Should Be!
§ How you set up your bookkeeping will determine if you survive
§ Only ADJUSTMENT (not deduction) allowed is for COGS

22. HOW YOU CAN GET AROUND THIS?
ANSWER: A MANAGEMENT COMPANY

23. HOW YOU CAN GET AROUND THIS?
ANSWER: THREE COMPANIES
1. LLC OWNS THE LICENSE
2. SECOND LLC IS THE MANAGEMENT COMPANY
3. C. CORP OWNS THE SHARES OF THE
MANAGEMENT COMPANY

24. HOW IT WORKS
q Management agreement ties the management
company to the cannabis enterprise
q By charging markup on capital loaned to the
company, providing goods, services, etc., you can
generally create an extra 10-18% hike in COGS

25. HOW IT WORKS (CONT’D)
q Don’t let COGS go higher than 80-85% - this is an
automatic audit trigger
q IRS will allow you to create a formula for
capitalizing COGS and adjusting income (it’s not a
deduction) on your tax return

26. AUDIT TIME
vExpect to be audited within first three years you’re in
business
vCost accounting, receipts and documentation will
either save you or drown you
vCost accounting is critical – allows you to justify your
COGS
vSpeak to accountant or tax lawyer familiar with
cannabis enterprises to create your chart of accounts

27. AUDIT QUESITON
If & When You Are Audited,
Who is the Proper Person to Represent
Me, My Accountant or My Lawyer?

28. ANSWER: YOUR LAWYER
• Lawyers maintain privilege over their clients
documents
• Accountants can have their work papers, tax
calculations, etc. subpoenaed by the IRS
• This can provide the IRS with sufficient
information to charge you both criminally & civilly

29. THE TWO BUSINESS RULE

30. TWO BUSINESS RULE
q Cannabis business can share same space with
another business that is “legitimate,” and take
deductions for it
q Example:
o Dispensary can also host nutrition counseling, patient
advocacy, caregiving services, under same roof
o The space used, electricity, personnel, etc. can be deducted
by the legitimate business

31. TAX TIPS
Create a formula…
q Consult your accountant or tax lawyer – not the
easiest thing to do, and it’s critical to your success
q Read up on 280E – there may be things you forgot
to capitalize
q Figure out how to relate any costs to your COGS

32. THANK YOU!