IRS 280E: A Real Bummer For The Marijuana Industry


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 Producers Gobble Up Warehouse Space In Denver Area

COLORADO:  Steve Badgley has been hunting for a larger warehouse in the Denver area for more than a year. But his construction-supply business keeps getting squeezed out by a new entrant into the real-estate market: the marijuana industry.

Since voters in Colorado and Washington legalized recreational use of the drug in 2012, growers and distributors have gobbled up most of the available warehouse space in the Denver area, a major logistics hub for companies moving goods between the Midwest and the West Coast.

The marijuana industry is poised to expand quickly. Legal sales in Colorado of medical and recreational cannabis totaled about $700 million in 2014, the first full year for which statistics are available, according to a Wall Street Journal analysis of Colorado tax data. The number of active licenses to grow the plant for retail consumption shot up to 397 from 204, according to Colorado’s Marijuana Enforcement Division.

The problem for Denver business owners: marijuana producers require lots of space to grow, package and store their products. In all, growers and distributors took up a third of all the warehouse space leased in Colorado over the past 18 months, according to Cresa Partners, a brokerage.


Illinois’ Medical Marijuana Businesses Are Hiring

ILLINOIS:  As Illinois’ fledgling marijuana industry slowly gets underway, some companies have begun hiring in anticipation of opening in the coming months, attracting a diverse set of candidates willing to take a chance on a business with an uncertain future so they can get in on the ground floor.

Take Rick Bower, 58, of downstate Dwight. After working for 31 years at commercial printing giant RR Donnelley, Bower has been hired as the inaugural director of warehousing at PharmaCann, where he will bring his expertise in workflow standardization and quality control to its Dwight and Hillcrest cultivation centers.

“I was looking, as people do at a certain age, for something with a little meaning,” Bower said of the career change. Bower, whose grandson’s 7-year-old cousin has a rare form of epilepsy helped by cannabis, said he tracked down the CEO to learn how he might get involved.

Marijuana Growing Spikes Denver Energy Demand

COLORADO:  Surging electricity consumption by Colorado’s booming marijuana industry is sabotaging Denver’s push to use less energy — just as the White House perfects a Clean Power Plan to cut carbon pollution.

Citywide electricity use has been rising at the rate of 1.2 percent a year, and 45 percent of that increase comes from marijuana-growing facilities, Denver officials said Wednesday.

Denver has a goal of capping energy use at 2012 levels. Electricity is a big part of that.

The latest Xcel Energy data show cannabis grow facilities statewide, the bulk in Denver, used as much as 200 million kilowatt hours of electricity in 2014, utility officials said. City officials said 354 grow facilities in Denver used about 121 million kwh in 2013, up from 86 million kwh at 351 facilities in 2012.

What ’60 Minutes’ Didn’t Tell You About Legalized Marijuana

COLORADO:  On Sunday night, ’60 Minutes’ revisited a story it had previously aired on the state of Colorado’s legalized marijuana industry, going back to the state in order to get an update. The story gave a great broad overview of the industry, but by trying to cover so many parts of this business, many things were missed.

The ’60 Minutes’ piece, called ‘Colorado Pot,’ noted that it isn’t easy to make money in legalized marijuana, but then like most of these general stories, zoomed in on the giant safe full of cash. The public assumes that because these businesses are awash in cash that they are profitable. That isn’t necessarily the case. The story did touch on the seed-to-sale software, but didn’t note that for the huge warehouse full of plants featured in the story, the software company could be charging anywhere from $0.25 to $0.45 an RFID or bar-code. These bar-codes can’t be reused and a big warehouse like the one on the show that is growing thousands of plants is spending thousands for inventory tracking.

The show was accurate in describing the difficulty these business owners face in finding a bank. Most of the major banks will not service these customers and some of the state chartered banks that were stepping in are now pulling back. First, they are concerned about the new Attorney General Loretta Lynch who is not for legalization. Secondly, it’s expensive for the banks to handle these customers. The amount of employees required to fill out all the paperwork to keep the banks in compliance make these money losing customers. The banks have to fill out SARS paperwork or Suspicious Activity Reports on the accounts. This takes people and time and while these businesses may be swimming in cash, it doesn’t pay off for the smaller banks. The big banks have said they won’t allow this type of banking until marijuana is no longer illegal at the Federal level.

Marijuana Investors, Suppliers Gather For Investment Conference

TEXAS:  Marijuana is illegal in Texas, but that didn’t stop suppliers and investors of the legal marijuana trade from coming together at the Westin Hotel in Memorial City.

More than 100 people attended the two-day Marijuana Investment Conference on Oct. 5-6, the first of its kind in Texas.

“We feel there is a very close parallel between the typical Houston high net worth oil and gas investor and the cannabis investor,” said organizer Doug Leighton. “Very high risks, but very high reward.”

Leighton is with Duchess Capital, the main sponsor of the event. He said the event was not about lobbying to legalize marijuana.

“The illegal market for marijuana is $50 billion a year, the legal market is $1.4 billion, so that gap has to be narrowed,” Leighton said.

One of those hoping to meet with investors was Dr. Elias Jackson, who runs a Houston-based biotech firm.

The Marijuana Show – In Search Of The Next Marijuana Millionaire

COLORADO:  Imagine the Shark Tank–but with pot. Welcome to The Marijuana Show. National business guru consultants Karen Paull and Wendy Robbins are looking for the next Marijuana Millionaire. Between the two, they have decades of invaluable business experience in inventions and consulting. This industry has grossed $30 million for Colorado in taxes so far this year. No longer shrouded in cliché stoner stereotypes, the pot industry is lucrative, The Marijuana Show is in search of the next brilliant business idea that will take the marijuana industry by storm.

This is an end-of-prohibition time period for the state of Colorado. We are leading the country in the “green rush”. All eyes are on the Marijuana Show, Paull and Robbins are creating a spotlight for the positive, innovative, green, and even ingenious potential in the marijuana industry.

The Marijuana Show is more than just the pitch, it serves as a boot camp. These women know people even with preexisting business who need help. How do I take it to the next step? They would take auditions from people with seriously concrete business plans, to people with just an idea. They want pre-existing companies who want to grow and expand and take their business model and move it to another place. They want green inventors, engineers, and people who could make the marijuana industry more lucrative for a sustainable future. Come one come all.


These People Left Respectable Corporate Jobs To Work In The Booming Marijuana Industry

COLORADO:  In late 2010, Derek Peterson was fired from his job as a vice president at Morgan Stanley, where he had been managing a $100 million fund.

But instead of looking for another job on Wall Street, Peterson decided to dive head first into the marijuana industry side project that had gotten him fired in the first place.

Nearly four years later, he says it’s working out.

By operating his own dispensary in northern California and selling hydroponic equipment to marijuana growers as CEO of his company Terra Tech, Peterson says he’s helping people get a product that actually makes their lives better, a feeling he didn’t necessarily have during his time on Wall Street.


A Marijuana Tidal Wave?

The marijuana industry just got a critical boost in its effort to become a massive and completely legitimate business.

On Friday, two federal law-enforcement agencies released coordinated statements clearing the way for banks to take deposits from and offer financial services to marijuana producers and retailers without fear of prosecution for money laundering.

To say that this will ignite a revolution in the still upstart industry would be an egregious understatement.

“It is imperative that this legal industry have access to banking the same as every other business sector,” said Mike Elliot, executive director of the Medical Marijuana Industry Group. “To continue doing business on a largely cash basis creates serious safety issues for owners, employees, and customers.”


Here's How Many Pot Shops Will Open In Denver After Weed Is Legal

COLORADO:  As few as five to ten Denver-area pot shops may be allowed to start selling recreational weed when Colorado’s landmark law goes into effect on January 1, despite more than 100 businesses waiting for approval from the city.

Dispensary owners say they’re facing delays that could prevent a vast majority of shops from being able to sell retail marijuana to adults 21-and-over come the new year.

“It has been very frustrating from a multitude of angles working with Denver City and County, the various departments within the government,” Toni Fox, owner of 3D Cannabis Center in Denver, told The Huffington Post. “Right now what’s happening is there are a few of us that have had all of our T’s crossed and I’s dotted since day one and we’re ready, but there’s just this delay.” [Read more…]