Section 280E and The Taxation of Cannabis Businesses

CANNANNEW REPORT

Section 280E of the Internal Revenue Code prohibits taxpayers who are engaged in the business of trafficking certain controlled substances (including, most notably, marijuana) from deducting typical business expenses associated those activities. Section 280E, which was enacted in 1982 during the so-called War on Drugs, has become increasingly relevant for cannabis (marijuana) businesses. The marijuana industry has grown substantially in recent years and is projected to take in more than $25 billion annually by 2025. This revenue growth has been driven by an increasing number of states opting to legalize marijuana. But despite this trend towards legalization at the state level, marijuana remains illegal under federal law—it is classified as a Schedule I controlled substance under the Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. §801–971 (1970), (“Controlled Substances Act” or “CSA”), raising the specter of section 280E. By enacting section 280E, Congress sought to reverse a then-recent Tax Court decision: The 1981 landmark case of Edmondson v. Commissioner. In that case, the Tax Court allowed a trafficker of amphetamines, cocaine, and cannabis to deduct ordinary and necessary business expenses related to an illicit drug business.[1] The expenses included rent, packaging, telephone, automobile expenses and the purchase of a small scale.[2] In response,[3] Congress enacted Section 280E,[4] preventing businesses engaged in certain illegal activities from recovering costs related to controlled substances or claiming associated business deductions[5]—that is, disallowing deductions that would otherwise be available under Section 162. Generally, Section 162(a) allows a taxpayer to deduct ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business.[6] Deductions under Section 162, however, are, as the adage goes, “matters of legislative grace” and “Congress [may generally] condition, limit, or deny deductions from gross income in arriving at the net which is to be taxed.”[7] Section 280E provides that: No deduction or credit shall…

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Source : Section 280E and The Taxation of Cannabis Businesses

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