IRS 280E: A Real Bummer For The Marijuana Industry

BY LARRY J. BRANT

As a general rule, in accordance with IRC § 162(a), taxpayers are allowed to deduct, for federal income tax purposes, all of the ordinary and necessary expenses they paid or incurred during the taxable year in carrying on a trade or business.  There are, however, numerous exceptions to this general rule.  One exception is found in IRC § 280E.  It provides:

“No deduction or credit shall be allowed for any payment 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.”

Congress enacted IRC § 280E as part of the Tax Equity and Fiscal Responsibility Act of 1982, in part, to support the government’s campaign to curb illegal drug trafficking.  Even though several states have now legalized medical and/or recreational marijuana, IRC § 280E may come into play.  The sale or distribution of marijuana is still a crime under federal law.  The impact of IRC § 280E is to limit the taxpayer’s business deductions to the cost of goods sold.

On October 22, 2015, the U.S. Tax Court issued its opinion in Canna Care, Inc. v. Commissioner, T.C. Memo 2015-206.  In that case, Judge Haines was presented with a California taxpayer that is in the business of selling medical marijuana, an activity that is legal under California law.

The facts of this case are interesting.  Bryan and Lanette Davies, facing significant financial setbacks and hefty educational costs for their six (6) children, turned to faith for a solution.  After “much prayer,” Mr. Davies concluded that God wanted him to start a medical marijuana business.  Unfortunately, it does not appear that he consulted with God or a qualified tax advisor about the tax implications of this new business before he and his wife embarked upon the activity.

Marijuana Businesses Are Raking In Money—And The IRS Will Take Most Of It

OREGON: The line along Southeast Hawthorne Boulevard looked like a windfall for Farma.

A crowd started gathering outside the Portland medical-marijuana dispensary shortly before 10 am on Oct. 1, the first day of legal recreational pot sales in Oregon. By the end of the day, more than 250 customers at Farma bought weed at $70 a quarter-ounce.

But Farma co-owner Jeremy Plumb isn’t expecting to keep much of the money.

“People don’t understand,” Plumb says. “They see this huge volume of business and they think we must be making money hand over fist.”

The long lines and eager customers at Portland’s pot dispensaries this week disguise a bitter financial reality: Much of the cash from Oregon’s legal weed sales is being inhaled by the Internal Revenue Service.

IRS Position On 502 Excise Taxes – “Don’t Count Excise Tax Amount As Income”

WASHINGTON: Dean Guske, CPA to many marijuana businesses in Washington State (and around the country),  and his firm, Guske & Company, have been taking the position with their clients since the beginning of the year that the 502 excise taxes DO NOT have to be counted as income when 502 Cannabis businesses file their federal income taxes.  Instead, the excise tax is a reduction from the net income.

This is in direct contradiction to what most people in the industry have thought was the position of the IRS – that the full amount taken in from sales would be counted as income before the excise taxes were paid to the Washington State Department of Revenue, and therefore would double tax the businesses by having to pay tax on income they didn’t get to keep.

But a new memo issued by the IRS today confirms Guske’s position, concluding that: “A taxpayer who paid the State of Washington marijuana excise tax should treat the expenditure as a reduction in the amount realized on the sale of the property.”

You can read the full memo here.

Tax Time Hits Hard For Marijuana Businesses

COLORADO:  It’s tax time and small business owners all over America are digging out their receipts for deductions, except marijuana business owners because most deductions aren’t for them.

Some of the top tax deductions for small businesses include advertising, office supplies, utilities, business entertaining and legal fees. But cannabis businesses face an different issue that marijuana tax expert refer to as the 280 (e) problem. This U.S. tax code addresses expenditures in connection with the illegal sale of drugs. Marijuana is still classified as a Schedule 1 controlled substance and so the Internal Revenue Service must treat it as such, no matter what a state law may say. The code says no deduction or credit shall be allowed for any amount paid in carrying on a business in a controlled substance. The only deduction allowed is cost of goods sold and it’s used to reduce the gross profits.

These businesses found that it is critical to make sure the expenses are properly categorized as their tax returns are sure to be scrutinized. Accurate record keeping is critical not only for the marijuana businesses, but also the state governments that want to make sure they are collecting all the taxes owed to them. This isn’t a small amount of money. For example, Colorado collected $43 million in taxes for the fiscal year of 2014-2015 and local governments received over $547,000 from this kitty.

 

IRS Advisory Council OKs Marijuana-related Businesses For Accountants

DISTRICT OF COLUMBIA: On Wednesday the IRS Advisory Council (IRSAC) released a report making a number of observations and recommendations to the Internal Revenue Service and federal policy makers relating to the need for greater latitude and legal protections (under the current federal anti-marijuana laws) for tax professionals who choose to work for clients who are in the cannabis industry.

“With over 20 states allowing medical marijuana and now states beginning to legalize recreational marijuana, this industry needs qualified, ethical professionals to help them fulfill their income tax obligations.” IRSAC concluded, “…tax professionals need reassurance regarding their own roles in giving tax advice to and preparing tax returns for such businesses.”

For more information, please contact Allen St. Pierre, NORML Executive Director, or Erik Altieri, NORML Communications Director, at (202) 483-5500. The applicable section regarding IRSAC’s recommendations to policy makers about changing cannabis laws and customs are found at pages 25-27 of the report @http://www.irs.gov/PUP/taxpros/2014-IRSAC-Full-Report.pdf.

Marijuana Taxes in Colorado — An Early Clue

COLORADO: Across America, lawmakers are eyeing tax revenue from legalized marijuana. Colorado and Washington are each officially expecting over $100 million annually in marijuana excise taxes. In a few days, the Colorado Department of Revenue is due to report how much marijuana tax was paid there for January, the first full month of recreational sales anywhere ever.

But the report on January collections will tell us next to nothing about what other states can expect, and only a little about Colorado. You can multiply January taxes by 12, but that won’t show annual marijuana revenue the state can count on from now on — for two reasons. First, the mature market will not resemble the start-up January market. Second, Colorado will start taxing some transactions that it exempted in January.

Start-up Uncertainties

In future months, Colorado’s industry will probably sell more grams of marijuana than it sold in January, but at lower prices. More grams will pull taxes up. Lower prices will push taxes down. It’s not clear where taxes will end up.

 

IRS Manual Detailed DEA's Use of Hidden Intel Evidence

DISTRICT OF COLUMBIA: Details of a U.S. Drug Enforcement Administration program that feeds tips to federal agents and then instructs them to alter the investigative trail were published in a manual used by agents of the Internal Revenue Service for two years. [Read more…]