IRS 280E Remains a Tax Nightmare for Cannabis Industry

With the IRS having recently issued new guidance regarding its treatment of cannabis businesses, it is worth once again revisiting what remains a thorn in the side for cannabis businesses in the United States: Internal Revenue Code 280E. Section 280E of the Internal Revenue Code disallows all deductions and credits for a business that sells or traffics in marijuana. The upshot of this is that cannabis businesses operating legally under existing state laws are unable to take otherwise standard business deductions. This makes an already difficult industry to navigate that much more confusing, and exposes entrepreneurs to significant downside in their operations. The guidance does point out, however, that Section 280E does not prohibit a marijuana business from reducing its gross receipts by its cost of goods sold, as calculated pursuant to the Internal Revenue Code. As a result, a marijuana business can reduce its gross income by its costs of goods sold, but cannot deduct other business expenses. Further complicating matters is that existing case law indicates that there are potential methods of segregating business practices within a legal canabis business (and its premises) that may further allow for easing of tax burdens and open the door to certain deductions, so long as "trafficking" business practices are separated from other activities. As with any endeavor in the cannabis industry, working with experience, sophisticated corporate counsel that understands the cannabis business and its attendant legal pitfalls remains critical to success.