An accountant wrote a very interesting article about accounting for marijuana businesses and Internal Revenue Code Section 280E.  If you own a cannabis business you should read the article.

“I have been a cannabis tax professional for six years now. Initially, I can remember reading articles from organizations like the AICPA, saying that since cannabis was illegal federally, that any accountant that participated in helping those in cannabis were in jeopardy of losing their license. But then what do you expect from an industry that is so far behind, a majority of tax accountants are still printing and mailing tax returns.”

See also “Tax Professionals Need to Talk about the Cannabis Industry.”

Leafly:  “The sweeping tax bill passed by the US Senate over the weekend contains all sorts of giveaways to businesses, from generous write-offs for factories and equipment to bargain-basement rates on offshore tax havens. But for all the boons to business it provides, the bill fails to deliver commonsense tax reform to the cannabis industry.  Two separate proposed amendments to the Senate tax bill would have ended a decades-old penalty that currently treats state-legal cannabis businesses like drug cartels. The rule, IRS Section 280E, prevents cannabis businesses from taking tax deductions available to other industries, often pushing their effective tax rates to more than 70%.

Freshtoast:  “Arcane rule in IRS code prevents cannabis companies from legitimate deductions.  Marijuana retail shops are more profitable than the average Starbucks store if only if they were taxed the same way as traditional retailer, according to a report published by Arcview Market Research.”

The CPA Journal:  “The IRS has made it daunting for an investor to make an after-tax profit in the marijuana business. Aside from the criminal laws, which are essential to know, trying to understand the tax laws can be a challenge. It is therefore critical to consider the right ways to structure the ownership of these businesses in order to reduce the tax impact for investors.”

The CPA Journal:  “The biggest hurdle for dispensaries is the current tax framework, which treats marijuana growers more adversely than both legal and illegal businesses alike. Under Internal Revenue Code (IRC) section 61, unless specifically excluded, all sources of income are taxable, regardless of their origin. Under the recovery of capital doctrine, taxpayers are allowed to recover their cost of goods sold. In addition, IRC section 162 provides a current deduction for all ordinary and necessary business expenses. . . . . There is, however, an additional limitation for taxpayers engaged in the trafficking of controlled substances. IRC section 280E denies all ordinary and necessary business expenses paid or incurred in connection with the sale or trafficking of controlled substances listed on Schedule I or II of the Controlled Substances Act. Currently, 21 USC 812(c)(10) lists marijuana as a Schedule I drug. Furthermore, the courts have held that the sale of marijuana constitutes trafficking, regardless of legality at the state level. Thus, the ordinary and necessary deductions available to most businesses (both legal and illegal) are denied to the marijuana industry.”

Bloomberg:  “Does your state permit sales of medical marijuana? If so, will you be prosecuted for filing your tax return and reporting your state medical marijuana income? You could, if you report illegal sources of income and fail to invoke your Fifth Amendment right against self-incrimination. In this article, Ropes and Gray LLP’s Gabrielle G. Hirz and Kathleen Saunders Gregor, and Stefan G. Herlitz of Harvard Law School discuss filing and reporting income, even illegal income, and how the Fifth Amendment applies to tax returns and audits. “

Phoenix New Times:  “Medical-marijuana businesses in Maricopa County haven’t been paying as much in property tax as they could.  County Assessor Paul Petersen wants to change that.  Over the next few years, his plan to start enforcing business personal property tax on dispensaries and cultivation facilities is expected to yield millions of dollars in new revenue for county schools and community colleges.”

See also “Maricopa County taxman to medical-marijuana businesses: Pay up or else.”

Brietbart:  “Less than a year after Massachusetts voters approved legalizing marijuana and taxing it at a rate of 12 percent, lawmakers already seek a larger take of the dealer’s cut.  In shifting marijuana from decriminalized to legal status, voters permitted a maximum tax of 12 percent on sales of the sweet leaf. Seven months later, the state legislature seeks to grab more of pot profits by permitting taxes as high as 28 percent.”

Forbes.com:  “Members of Congress on Thursday tried to throw the cannabis industry a legislative lifeline on taxes. The Small Business Tax Equity Act of 2017, introduced in the House by Rep. Carlos Curbelo (R-FL) and Rep. Earl Blumenauer (D-OR) and in the Senate by Sen. Ron Wyden (D-OR), Sen. Rand Paul (R-KY), and Sen. Michael Bennet (D-CO) today, would allow state-legal cannabis businesses to take normal business deductions like any other legal business. Known as 280E, the tax code provision prevents cannabis businesses from taking normal business deductions related to sales.

Craig W. Smalley, who has a Masters in Taxation, wrote a three part article on how Internal Revenue Code Section 280E affects the federal income taxation of businesses that grow or sell marijuana.  The first article starts with:

“Following the 2016 elections, marijuana is now legal in some capacity in 28 states. However, even though it’s legal in certain states, the federal government considers the drug an illegal Schedule I narcotic. Resultingly, business owners in the marijuana industry have hit a wall with IRC §280E, which states:

‘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’.”

See Part 1, Part 2 and Part 3.

Arizona Republic:  “Proponents arguing that Arizonans should vote for this initiative dangle before voters the prospect that marijuana, once “regulated like alcohol,” will bring in massive tax revenues: between $40 million and $113 million, as reported by The Arizona Republic, if the act goes into effect. But these estimates fail to account for the undercutting effect of Arizona’s medical-marijuana market on the sale of recreational marijuana.  Unless Arizona does something to rein in medical marijuana taxation, it’ll just be chasing smoke.

Lane Powell PC:  “Section 280E provides: ‘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.’ Section 280E will cease to apply to cannabis businesses if and when cannabis is no longer classified as a Schedule I or Schedule II controlled substance.

Cannabis businesses have developed two approaches to minimize the impact of section 280E:  First, taxpayers have tried separating their trade or business activities into two sets of businesses: businesses that consist of “drug trafficking” and businesses that do not. . . . The second approach to minimizing the impact of section 280E is characterize as many costs as possible as COGS rather than operating expenses.

Forbes:  “A test case challenging the Internal Revenue Service (IRS) interpretation of expenses related to the sale of medical marijuana is headed to court: on Monday, June 6, Harborside Health Center, the country’s largest medical marijuana dispensary, will be in Tax Court to argue the application of section 280E of the Internal Revenue Code.  Under current federal law, marijuana is classified as a Schedule I drug, putting it in the same category as heroin, . . . the IRS sent Harborside a bill for $2.4 million. The reason for the tax bill? The IRS declared Harborside (and thus all medical marijuana dispensaries) to be drug trafficking organizations (DTOs) and therefore subject to a special tax rule found at Section 280E of the tax code. That rule says that expenses connected with the sale of certain illegal drugs – including Schedule I drugs, like marijuana – are disallowed

Arizona Republic:  “Arizona could see as much as $113 million in new tax revenue if it legalized marijuana for recreational use and imposed a 15 percent levy on the drug, a new study found.  The study by the non-partisan Tax Foundation comes as cannabis supporters in Arizona prepare to turn in hundreds of thousands of signatures to try to put their legalization effort before voters in November.”

JD Supra:  “Measure 91, officially called the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act, passed by Oregon voters, appears to have alleviated some of the impact of Code Section 280E as it relates to Oregon taxable income. Specifically:

1. Section 71 of Measure 91 provides that Code Section 280E does not apply for purposes of determining Oregon taxable income or loss under our corporate income tax regime. This provision sets forth no specific effective date. So, in accordance with Sections 81 and 82 of Measure 91, it became effective on July 1, 2015.
2. Section 74 of Measure 91 provides that Code Section 280E does not apply for purposes of determining Oregon taxable income or loss under our individual income tax regime. This provision of Measure 91 specifically provides that the change became effective for tax years beginning on or after January 1, 2015.”

The National Cannabis Industry Association (NCIA) recently released a 280E white paper that explains Internal Revenue Code Section 280E. The paper has an informative frequently asked questions section.  All Arizona medical marijuana dispensaries should get a free copy of the paper.

Brookings:  “As states legalize marijuana, more marijuana businesses are opening across the country. An obscure 1982 brainchild of Bob Dole’s Senate Finance Committee, section 280E of the federal tax code, is hitting state-legal marijuana sellers in the pocketbook—right now. 280E, which says taxpayers cannot deduct costs of selling federally illegal drugs, is not just helping fund the federal government. It’s also hampering marijuana advertising and marketing—to the satisfaction of nervous parents, and to the consternation of profit-seeking marijuana promoters.  280E was more a political statement than a model of tax policy, and it can’t eliminate marijuana advertising. But it does discourage that advertising, so it may be one of the most useful marijuana tax laws we can imagine. And while some anti-advertising proposals run afoul of the commercial free speech doctrine, 280E is constitutional. So 280E may help slow down Big Marijuana. If so, an anti-advertising tax rule like 280E might come in handy if the public ever musters the strength to take on Big Alcohol and Big Tobacco.