One of the most frustrating tax law sections for cannabis companies, Section 280E of the Internal Revenue Code (“IRC Section 280E”) forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of substances on Schedule I or II of the Controlled Substances Act. The IRS has subsequently applied IRC 280E to state-legal cannabis businesses, since cannabis remains on Schedule I as a controlled substance.
IRC 280E originated from a 1981 court case in which a convicted cocaine trafficker asserted his rights under federal tax law to deduct ordinary business expenses. In 1982, Congress created IRC 280E to prevent other drug dealers from following suit. In summary, it states that no deductions can be allowed on any amount “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.”
With 36 states and the District of Columbia now allowing some form of legal marijuana, IRC 280E is applied to state-regulated cannabis businesses more often than it is to the types of illegal drug dealers that the provision was intended to penalize.
“I can’t give my employees raises. I can’t put money back into my business. Instead I’ve been hoarding cash in anticipation of what the IRS is going to take.”
– Mitch Woolheiser, Northern Lights Cannabis
For more information on IRC Section 280E, you can read this whitepaper from the National Cannabis Industry Association.