One of the benefits of owning a business in the U.S. is the leeway one has in writing off business related expenses to reduce your overall tax burden. Unfortunately, when it comes to the cannabis industry, business owners are not afforded the same luxury.
What is Section 280E?
Under section 280E of the U.S. tax code, tax credits are not available for incomes derived from substances listed as either Schedule 1 and Schedule 2. In other words, cannabis industry entrepreneurs are drug dealers in the eyes of the feds and therefore get no breaks.
Where did Section 280E come from?
Section 280E came about in September of 1982, after a cocaine dealer was busted, but maintained he had the right to write-off non-drug related expenses as part of his business operations. Nice try, but the court disagreed and shortly after, the IRS adopted 280E. Fast forward thirty plus years and the situation has changed. The overwhelming consensus among Americans is that marijuana should be legal. A small faction of individuals in various parts of the government whose careers are dependent on marijuana prohibition are doing everything they can to delay the inevitable, including the IRS.
How 280E affects the cannabis industry
The IRS has not made any progress in softening the burden for cannabis entrepreneurs as they continue to do everything in their power to make operating a cannabis business a difficult as possible. While most entrepreneurs freely write-off just about everything, cannabis business owners are restricted to a handful of deductions including labor and limited costs surrounding production. The failure to progress with the attitudes of the populace and create new regulation for cannabis entrepreneurs demonstrates the resistance of the old guard.
The cannabis industry is raking in cash hand over fist. While the IRS can do nothing to stop the industry from growing, they can do everything in their power to maximize the amount of money they extract from it before more comprehensive, cannabis industry specific tax law can be written. Efforts have been made to reign in the IRS in as far as cannabis goes. In 2013, legislation was introduced that was meant to remove cannabis business from federal tax regulation while new cannabis specific law could be written. While legislation like this seems to go nowhere, the reality that cannabis must be dealt with under its own tax parameters is becoming harder to ignore.
Section 280E successes in the cannabis industry
There have been incremental victories won, including the 2007 CHAMP decision. CHAMP, a medical dispensary in California was taken to court over its tax bill. The lawyers for CHAMP argued that despite the strict guidelines of section 280E, cannabis businesses still had a right to deduct the costs of operating a business that were not related to the trafficking of controlled substances. Ultimately the ruling allowed cannabis entrepreneurs who ran multiple businesses under one roof to deduct some of the operating costs of both companies. As example, CHAMP ran a dispensary which sold marijuana, but also ran a consulting and patient referral business.
The CHAMP ruling allowed many cannabis businesses to split their operations into multiple companies as a way to get around many of the 280E regulations and still remain in legal compliance. The intent of section 280E was fundamentally to prevent cocaine dealers from writing off mansions and yachts, but the emergence of industries that overlap with the previous law just doesn’t square.
Tax code 280E reform and progress
The failure to implement new tax code for the purpose of distinguishing between legal cannabis businesses and illicit drug dealers has done nothing but force legitimate businesses to resort to makeshift fixes, like the CHAMP ruling and other loopholes they can find. Much like prohibition created a black market, inappropriate tax law does nothing but force cannabis businesses to find new and creative ways to reduce their tax burden. As cannabis acceptance continues to grow, it would seem that these problems in the tax code are transitional. Let’s hope they are.
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