Updated: Jul 9, 2020
By Ashley Ellixson
This post should not be construed as legal advice but rather educational in nature.
Section 280E of the Internal Revenue Code (IRC) came about as a result of a 1981 court case where a convicted cocaine trafficker attempted to use his right under Federal tax law to deduct ordinary business expenses. I am sure you can see that deducting business expenses for a cocaine trafficking business might sound wrong. Right? Well, if you thought that then you are right on track to what the Federal government in 1982 also thought.
In 1982, Congress created Section 280E to prevent drug dealers, traffickers, and the like from deducting ordinary business expenses. Section 280E states that no deductions should be allowed in any amount “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.” The substances Section 280E prohibits deductions from are Schedule I and Substance II as defined by the Controlled Substances Act.
So you might be wondering now: what does that mean, Ashley, and what does it have to do with state-legalized marijuana? That is exactly what I will now address. In 1982, section 280E was mostly intended to stop large drug trafficking businesses. Today, however, the Internal Revenue Service (IRS) is applying Section 280E to state-legalized marijuana businesses because marijuana, at the Federal level, is still a Schedule I substance.
Owners of regular businesses, as many of you already know, often derive profits from business deductions. The basics of Federal income taxes can be illustrated by a general formula: gross income-business expenses=taxable income. The difference between regular businesses and marijuana businesses, however, is that marijuana businesses pay taxes on their gross income because Section 280E does not allow those businesses to deduct expenses. For example, the types of business expenses not allowed to be deducted if you are a state-legalized marijuana business are:
1. Employee salaries
2. Utility costs (internet, electricity, telephone)
3. Health insurance premiums
4. Marketing and advertising costs
5. Repairs and maintenance
6. Rental fees for facilities
7. Routine repair and maintenance
8. Payments to contractors
Although this is current Federal tax law, as more state-legalized marijuana businesses pop up and more states legalize marijuana, this could be a section of the tax code to keep a close eye on. Alternatively, be aware of the possibility that marijuana (cannabis) may have the potential to be removed from the Schedule I list. Only time will tell!