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December 14, 2017

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199A Meets 280E – Cannabis Biz and the New Tax Act

February 8, 2018

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Push Back On IRS 280E

December 14, 2017

Section 280E of the IRS tax code is something almost everyone in the cannabis industry has had to deal with. If a business touches the cannabis at any point, then they must use 280E because they are considered trafficking. 280E states: "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." 

 

Due to this tax code, these businesses handling cannabis can only deduct its costs of goods. This causes the taxable income for the business to be astronomically higher than if they were allowed to deduct its necessary and ordinary expenses like a normal business. Depending on the business entity, the owners may even be taxed "twice" (business and personal taxes). These unreasonably high taxes have caused a lot of push back in the form of petitions from cannabis companies operating within a state that has legalized cannabis.

 

Alicia Wallace has written an article about a company in Colorado called Colorado Alternative Health Care. It is currently fighting the IRS in tax court due to their tax determinations in 2010, 2011 and 2012. They are claiming that the IRS has taxed the same income twice. Colorado Alternative Health Care is a S Corp business entity, and therefore officer salaries are classified as "reasonable wages". However, the IRS determined that a portion of the "reasonable wages" was part of trafficking and therefore an expense. This means that the portion classified as trafficking is now non-deductible because it is not part of cost of goods per 280E. Rachel Gillette is the attorney representing Colorado Alternative Health Care in this case, and she believes that “(280E) is merely a punitive effect to people who play by the rules". 

 

This is an important issue for the industry until social policy changes, and will continue to affect the people within the industry. There are ways to lower your taxable income legally, but an accountant with clear knowledge on the tax code and industry is needed. If you want to learn more about the Colorado Alternative Health Care case written by Alicia Wallace, then click here.

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