Recently, Ritter Spencer’s Chelsie Spencer sat down with Texas based tax attorney Vu Le to discuss cannabis law and its interaction with IRS 280E. As you will hear Vu discuss in the video, Section 280E of the Internal Revenue Code prohibits medicinal and recreational marijuana companies from deducting normal business expenses, such as payroll and monthly rent costs, from gross income.
Section 280 of the Internal Revenue Code provides that ““No deduction or credit shall be allowed for any amount paid or incurred during the taxable year 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 (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” This portion of the Code applies to companies that are engaged in the trafficking of Schedule I or Schedule II controlled substances. 280E was originally intended to target criminal enterprises such as drug dealers. However, because marijuana currently remains a Schedule I substance under federal law, medicinal and recreational marijuana companies operating in permissive states (those states which have passed some form of legislation permitting medicinal or recreational use) must still follow 280E.
Because medicinal and recreational cannabis companies may only deduct the cost of goods sold, the effective tax rate that most cannabis companies are subjected to is approximately 70%. With such a high tax rate and a high incidence of tax audit for marijuana companies, tax attorney Vu Lee discusses tips that can assist cannabis companies in dealing with their 280E burden. Proper record keeping and document trails are of tantamount importance for cannabis companies. To learn more about 280E and how courts and the IRS have applied this portion of the Code, enjoy this video in our Cannabis Law series.
IRS 280E applies to the medicinal dispensaries currently operating in Texas. Because the 2018 Farm Bill removed hemp from the federal Controlled Substances Act’s definition of marijuana, Texas hemp and hemp-derivative companies that deal solely in hemp are not subject to 280E.