Nondeductible Expenses Under Sec. 280E
In 1982, Congress enacted Sec. 280E, which reversed a Tax Court decision (Edmondson, T.C. Memo. 1981-623) that had allowed deductions incurred in carrying on the production, distribution, and sale of controlled substances. Sec. 280E reads:
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 the 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.
In the context of marijuana, trafficking was defined by the Tax Court as the regular buying or selling of marijuana (Californians Helping to Alleviate Medical Problems (CHAMP), Inc., 128 T.C. 173 (2007)).
The production or sale of marijuana is still illegal under U.S. federal law. However, pursuant to the Controlled Substances Act (CSA) of 1970, P.L. 91-513, marijuana is listed as a Schedule I narcotic (21 U.S.C. §812). And, while there has been much discussion regarding the Department of Justice’s ability and/or willingness to enforce the CSA as it relates to marijuana in states that have legalized its use either medicinally or recreationally, the CSA is still in place, and therefore any references to it, e.g., in Sec. 280E, still apply.
In reading §280E any taxpayer would fret that income taxes would be calculated on all gross receipts! Even though §280E disallows all credits and deductions with respect to business trafficking in controlled substances, the Supreme Court has allowed us some deductions, i.e., the cost of goods sold deductions.
Click here to read the full article as featured in GREENWAY – The Missouri Cannabis Industry Publication.