Dave Dugdale

Understanding Internal Revenue Code Section 280E, Part 1

As of the writing of this piece, certain marijuana-­related activities have been legalized in 25 states and the District of Columbia. However, outdated sections of the tax code — namely Section 280E — continue to threaten the viability of state-legal cannabis businesses.

This is the first installment of a three-part series that will delve into and explain the intricacies of Section 280E, so stay tuned throughout the week for Parts 2 and 3!

What is Section 280E?

Section 280E of the Internal Revenue Code (IRC) restricts businesses from taking deductions for ordinary business expenses if the business has earned income from trafficking Schedule I or Schedule II substances per the Controlled Substances Act (CSA). This section was originally added to the IRC in 1982. However, it has now also been applied to cannabis businesses that operate legally under state law because cannabis is still listed as a Schedule I substance under the CSA.

Section 280E was created by Congress after a 1981 court case in which a convicted cocaine trafficker was disallowed from claiming deductions for ordinary business expenses under federal tax law. However, Section 280E is still being applied to legal cannabis businesses in these states despite the fact the law was mostly intended to target illegal drug dealers.

How Does Section 280E Affect State-Legal Cannabis Businesses?

For businesses in other industries, the ability to deduct ordinary business expenses provides important tax savings. In fact, many business owners actually increase the profitability of their businesses as a result of these business deductions.

However, for state-legal businesses in the cannabis industry, Section 280E means that these businesses often have tax liabilities that are up to 70% of their incomeWithout the ability to claim the deductions that other businesses can claim, Section 280E has created a bleak environment for cannabis companies in the United States.

In the next part, we will discuss how 280E affects cannabis businesses that are legal according to state law when it comes to the computation of federal income taxes.

For more information, continue reading Part 2 of our three-part series about this important tax issue.

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