Dave Dugdale

Is This the End of Section 280E?

Recent legislation introduced in the Senate and House of Representatives would end the federal prohibition of cannabis and replace it with a system that would regulate and tax marijuana in a manner similar to alcohol or tobacco.

According to a press release dated March 30, 2017,

Bills filed by Sen. Ron Wyden (D-OR) and Rep. Jared Polis (D-CO) would remove marijuana from the Controlled Substances Act, leaving states to determine their own marijuana policies, and impose federal regulations on marijuana businesses in states that choose to regulate marijuana for adult use. Wyden’s bill would also enact a federal excise tax on marijuana products. In the House, the tax is being proposed in a separate bill introduced by Rep. Earl Blumenauer (D-OR).

Wyden and Blumenauer also filed marijuana policy “gap” bills that would eliminate many of the collateral consequences associated with federal marijuana convictions without removing marijuana from the Controlled Substances Act.

That legislation has been introduced in the House and Senate, where it will be argued by the various chambers. The House and Senate must come to an agreement in order for an Act to be contrived for the president to sign. The president could either sign or veto the bill; if vetoed, it would return to Congress and they would need a three-fourths majority vote to override the veto.

Who knows what will happen with this legislation — but if it becomes a law, it would end Section 280E. Dispensaries and growers would be able to deduct salaries, rent, and all other necessary and ordinary expenses, just like any legal business. This would be huge for the legal cannabis industry.

Section 280E says:

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.

Tax Court has left the door open for tax accountants like me that look for ways around a stupid and oppressive law. What is typically done in states that allow it is the dispensary does some other business in addition to being a dispensary as a way to write off the expenses other than Cost of Goods Sold (COGS), which is basically the cost of the cannabis for dispensaries. If the state doesn’t allow it, then a creative way of calculating COGS is done.  

This legislation would also open banking opportunities up to dispensaries and growers; the only thing they would still have to fight is the stigma following the cannabis industry.

A big reason behind this bill’s introduction is Congress having seen what a cash cow cannabis could be. Every state with legal cannabis has imposed taxes on it, some as high as 15%. If you reread the excerpt of the press release, it mentions an excise tax similar to alcohol.  

One thing is certain — I will be watching this closely and updating you as news arises.

End


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Authored By

Craig W. Smalley, MST, EA, has been admitted to practice before the Internal Revenue Service as an Enrolled Agent, has a Masters in Taxation, and is a Certified Tax Resolution Specialist. He has been in practice for 23 years. He is the CEO and Founder of CWSEAPA®, PLLC, Tax Crisis Center®, LLC, and Cannabis Accounting Group®.  He is a columnist for Accounting Web, AICPA Tax Insider, and Accounting Today. He specializes in taxation and is well versed on U.S. Tax Court rulings. He can be reached at [email protected]

 

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