Taxand USA examines the unique tax issues that affect regulated cannabis businesses.
Introduced by the Reagan Administration, Section 280E of the Internal Revenue Code prohibits businesses selling cannabis from deducting otherwise ordinary business expenses from their gross income. However, with the industry rapidly expanding at the state and local level, many predict that it is only a matter of time before Congress acts to explain this archaic code section.
Today, the cultivation and sale of cannabis remains illegal under federal law (Controlled Substances Act 3), but a number of newly enacted laws demonstrate that states are willing to support this emerging industry.
Prior to 1982, when Section 280E was enacted, the tax code permitted businesses to deduct otherwise ordinary business expenses from gross income associated with the “trafficking” of controlled substances.
In 1981, the Tax Court allowed an illegal business to recover the cost of the controlled substances obtained on consignment and also claim certain business deductions, such as packing, telephone and automobile expenses (Jeffrey Edmondson v. Commissioner, T.C. Memo. 1981-623).
The cannabis industry is still in its early growth stages and faces a number of legal and fiscal challenges both at the state and federal level. Despite the success many states are having from a regulatory perspective, it is clear that the federal government isn’t in any hurry to overhaul its stance on cannabis. So long as Section 280E is around keeping its pockets full of income tax revenue from legal cannabis businesses, there is little chance for proactive legislative change.