Internal Revenue Code 280e

The Controlled Substances Act (CSA) expressly prohibits possession and commerce in marijuana. 21 U.S.C. §§ 841(a)(1), 846.  All marijuana is prohibited, no exceptions.

However, a different law that authorizes federal funds to the Department of Justice contains an exception to the prohibition of marijuana pursuant to the CSA – at least in Section 538 of the Budget that has defunded the war on medical marijuana.

Despite this, businesses still have problems with double taxation due to Section 280e of the Internal Revenue Code (IRC)

IRC 280e Text:

No deduction or credit shall be allowed for any amount 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.

(Added Pub. L. 97–248, title III, § 351(a), Sept. 3, 1982, 96 Stat. 640.)

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Here’s the takeaway from IRCE 280e

In 1980 a coke dealer got busted, but his attorney said that he should be able to deduct the cost of his illegal cocaine sales business.  As a result, Congress passed IRC280E and forbid deducting costs of “carrying on” a business of selling schedule 1 substances, which are prohibited by state or federal law.

Businesses typically deduct two main costs – those of goods sold, and those of ‘carrying on’ the business.  

The costs for carrying on a business are those related to operations in sales.  For example, your rent, phone bill, utilities, employees, marketing, little baggies for the above-described coke dealer, everything except the costs of the goods sold (COGS).

Fun Fact: Congress did not include COGS in the law banning the ‘carrying on’ deductions for fear of a constitutional challenge.

The marijuana industry makes this distinction quite easy. Costs of goods sold are those incurred in growing and preparing the crop for market, while those of carrying on the business are those related to its sale.  As a result, cultivation centers have to worry about the double tax less than dispensaries.  

IRC 280e will apply until Marijuana out of CSA

The costs a cultivation center incurs go to the cost of producing the cannabis, while the costs incurred by the dispensary are all related to its sale.

In the video, Tom explains how the precise wording of three pieces of federal law – and a bedrock principle of tax law – all come together to avoid the double taxation issue to state-law approved medical marijuana businesses.

Check out the video – and subscribe to the Cannabis Industry Lawyer’s YouTube channel to ask your question about a legal issue in the legal marijuana industry.