The Cost of Doing (Cannabis) Business: An Analysis of Four Federal Tax Cases on the Disallowance of Deductions and Credits under Section 280E
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Academic Unit
College of Business
Publication Date
2019
Document Type
Article
Abstract
In recent years, as state legalization of growing and selling cannabis has become more common, the federal government has generally taken a hand’s off approach. As of June 2019, 39 states and Washington DC have legalized growing and selling cannabis for either medical or recreational purposes. In 2017, legal cannabis sales grew to $8.5 billion in North America, and these sales are expected to continue to grow dramatically. Cannabis remains a Schedule I drug under the federal Comprehensive Drug Abuse Prevention and Control Act of 1970. However, federal prosecutors have not enforced criminal laws against those involved in cannabis businesses under state sanctioned programs. In contrast, though, the Treasury Department and the Internal Revenue Service have enforced Section 280E under Title 26 of the U.S. Internal Revenue Code against cannabis businesses. This section prohibits these businesses from taking any deductions or credits against their gross income from carrying on a trade or business that involves trafficking in controlled substances, including cannabis. This puts these otherwise lawabiding businesses in a difficult position. Four recent federal court decisions, two in the Tenth Circuit Court of Appeals and two in the U.S. Tax Court, demonstrate the application of Section 280E to cannabis businesses. These cases reveal that, unlike other businesses, they are taxed on their gross income and cannot deduct the costs of doing business, including some portions of the cost of goods sold and employee compensation. This limitation on deductions and credits can be imposed by the IRS even in the absence of proof that the business is trafficking cannabis or a criminal conviction. Because of this, cannabis businesses pay far more taxes on a percentage basis than other businesses. This likely will have a dramatic effect on whether new businesses will be able to break into the cannabis market and survive.
Volume
29
Issue
1
Beginning Page Number
1
Last Page Number
25
Recommended Citation
Keane, Alice E., "The Cost of Doing (Cannabis) Business: An Analysis of Four Federal Tax Cases on the Disallowance of Deductions and Credits under Section 280E" (2019). Faculty Authors and Creators Reception. 193.
https://opus.govst.edu/fac/193