By: James Mann and Rachel Gillette
Owners of cannabis businesses that operate in pass-through form – LLCs, partnerships, sole proprietorships and S Corporations – need to consider if the new Section 199A deduction can partially offset deductions disallowed under Section 280E of the Internal Revenue Code. The Tax Cuts and Jobs Act passed last reduced the corporate tax rate from 35% to 21%. In order to keep a level playing field, a new deduction for owners of businesses operated in pass-through form received a compensating deduction, Section 199A. This deduction can be up to 20% of the taxable income from the business.
For owners of businesses affected by Section 280E, the idea is that the increase in taxable income that results from the disallowance of cannabis-related deductions also increases the amount of “Qualified Business Income” that is used as the basis for the new 20% deduction. To be sure, that still leaves 80% of the disallowed deductions to increase taxable income, but reducing the pain by 20% is significant.
The calculation of the Section 199A deduction is quite complicated, however – it starts with the lesser of:
20% of taxpayer’s qualified business income OR
The greater of:
50% of the taxpayer’s share of W-2 wages with respect to the business
25% of the taxpayer’s share of W-2 wages with respect to the business plus 2.5% of the allocable share of the unadjusted basis of all qualified property (tangible personal property subject to depreciation and depreciable period is later of 10 years or regular straight line depreciation period, so 39 years in the case of a non-residential rental building)
There are numerous sub-calculations, but there are also opportunities for planning to maximize the deduction.
New Section 199A does not eliminate the punitive impact of Section 280E deduction disallowances, but it can lessen the pain sufficiently to make it worthwhile to investigate how it could help your tax burden.
About Greenspoon Marder
Greenspoon Marder is a national full-service business law firm with over 200 attorneys and offices across the United States. We are ranked among
American Lawyer’s Am Law 200, as one of the top law firms in the U.S. since 2015. Our firm was founded with the goal of providing the highest quality legal services at the highest value for our clients. Each of our clients is unique and so are their legal needs. We believe no one size fits all for professional services. Our lawyers offer flexible and creative solutions to meet our clients’ respective needs. Our mission is to understand the challenges our clients face, build collaborative relationships and craft solutions with a focus on strategic goals.
Natalie Villanueva, Director of Marketing
954.333.4308 | firstname.lastname@example.org
This Greenspoon Marder LLP Client Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.