1. Possible Solutions for Section 280E HOW TO DEAL WITH CANNABIS NON-DEDUCTIBLE EXPENSES MJ Consulting Services

2. What is IRC § 280E?  Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.  Passed by Congress in 1982 in response to a 1981 court case in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses. - Edmondson vs Commissioner.  Cannabis is still classified as a Schedule I narcotic  Cannabis businesses, thus pay taxes on gross income. These businesses often have tax rates that are 70-80%.

3. Effects of Section 280E Non-Cannabis Business Cannabis Business  Gross Revenue $1,000,000 $1,000,000  Cost of Goods Sold $650,000 $650,000  Gross Income $350,000 $350,000  Deductible Business Expenses $200,000 $0  Taxable Income $150,000 $350,000  Tax (30%) $45,000 $105,000  Effective Tax Rate 30% 70%

4. Subsequent Court Cases  Californians Helping to Alleviate Medical Problems (CHAMP) 2007 – allowed to deduct expenses related to "counseling and other caregiving services" even though the organization also distributed marijuana  Olive vs Commissioner – 2012 – MMJ dispensary was prevented from deducting business expenses. Concluded only “trade or business” was the sale of marijuana. Other services were offered for free  Courts noted that the test for determining if an activity is a “trade or business” is whether the activity is entered into with the intent of making a profit.

5. IRS regularly permits a taxpayer to engage in more than one artificial or unreasonable and intended solely to avoid taxes.  Under Section 482 IRS regularly permits a taxpayer to engage in more than one business unless the separate characterization is artificial or unreasonable and intended solely to avoid taxes.  Sales of Smoking Paraphernalia – bongs, pipes, papers, etc.  Sales of Posters and Clothing  Event Ticket Brokerages  Coffee Shop  Auto Sales

6. Legality  IRS normally allows more than one business entity in same location –  Similar to operating a business in your home - Publication 587 (2015), Business Use of Your Home  Washington Initiative 502 - Retail outlets may only sell marijuana, marijuana concentrates, marijuana infused products and marijuana paraphernalia.  Currently no restrictions implementing secondary business in other states in the same facility.

7. Event Ticket Brokerage  Primarily online interface – www.CannaTixx.com  4 Different tiers of this system  Subscription based system - $75/month  Own separate Website  Turnkey ticket brokerage – buy and sell tickets from inventory  Managed System with monthly management fee  Cost effective  Ease of Implementation  Training Supplied – key to success

8. Coffee Bistro  Turnkey Coffee Shop  Private labeled coffee and products  MJ Mikes Coffee – Based in Portland, Oregon – Best Coffee Cities USA 2015  Training to run coffee shop  Equipment and Supplies  Typical Starbucks Annual Sales is $755,951 Average profit for Starbucks is $108,000 per year  Added convenience and ambiance for customers