As part of the cannabis industry, you’ve probably heard rumors about the end of IRS Section 280E. Plenty of people in the business have been expressing optimism or even certainty lately that the rule is on its way out. But before you start counting on that, get the facts.
Despite what the rumor mill may have been churning up, this unpopular section of the Internal Revenue Code isn’t going anywhere anytime soon—and the IRS doesn’t grant exceptions to it, no matter what you’ve heard.
The Origins of Section 280E
Established in 1982, Section 280E prohibits business expense tax deductions for firms that traffic in the following drugs per the Controlled Substances Act (CSA):
- Schedule I substances such as heroin, LSD, and marijuana
- Schedule II narcotics, including cocaine and fentanyl, along with stimulants like methamphetamine
Where does that leave state-legal cannabis entities? As explained by the National Cannabis Industry Association, cannabis businesses can only use Cost of Goods Sold to reduce their taxable income. Unlike non-cannabis firms, they cannot deduct standard business expenses.
Why 280E Is Here to Stay
Let’s separate the facts from the fiction of 280E disappearing overnight.
The Endurance of CSA
Section 280E is inextricably tied to the CSA. If that law was abolished, then 280E would disappear along with it. But the reality is that the CSA is going to be around for a while. Attitudes about marijuana have changed drastically in the last decade, but the same cannot be said for other Schedule I or II substances such as heroin, fentanyl, or methamphetamine.
Federal Cannabis Illegality
Given the inconceivability of a CSA repeal, some hope that marijuana’s status as a Schedule I drug will change. While more likely, that’s still a longshot for the time being.
Yes, a majority of states have legalized medical marijuana, and more than a fifth have done the same for recreational use. Optimists have taken this as a sign that Congress may follow suit and legalize the drug at the federal level.
Though there’s been some talk about decriminalizing or descheduling marijuana, the reality is that there’s been little to no action on the issue. Furthermore, there don’t appear to be enough votes in Congress in favor of either option.
Tax Court Precedent
In the last few years, a number of cannabis businesses have fought 280E in Tax Court. Unfortunately, they’ve all lost.
In Marijuana Business Daily, a former IRS officer discussed the negative impact these cases have had on the entire industry:
- An IRS tightening of 280E
- More audits of cannabis businesses
- New precedents that raise the legal bar for change
- Costly legal bills for those involved
IRS Money Maker
That same IRS officer also noted how important 280E is to the U.S. Treasury. Businesses who abide by it pay more taxes, and those who don’t risk audits. The latter leads to more revenue from interest and penalties on unpaid taxes. The IRS doesn’t want to lose this valuable cash generator.
Need help deciphering 280E or figuring out what constitutes your Cost of Goods Sold? Count on My Cannabis Accountant for straight answers. We’re a boutique firm dedicated to providing accounting, tax, and consulting assistance to cannabis businesses across the United States.