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Tuesday, May 30, 2023

IRC § 280E is a target for legal reform of cannabis in 2023

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Will we see tax reform in 2023 for cannabis sellers? Specifically, will Congress finally do something about the pain being inflicted on the industry by the Internal Revenue Code at 26 USC § 280E? (“IRC 28oE”). It seems like a long shot, but you never know.

After many attempts to get a file SAFE Banking AcThrough Congress, I can tell that the industry is feeling a bit of a beatdown on the federal front. Democrats had two years of control to get and pass the SAFE Banking Act and politics prevented it from passing. I have sat on committees with many experts who rightly take the position that the way to get to federal legislation is through a piecemeal legislative process; Cut into bans one legal fix at a time. Hence, SAFE Banking makes a lot of sense.

Now that it’s dead and gone (for now), the industry might take some hope in the fact that Republican House Representative Nancy Mays is back again with some cannabis legislation. started with States Reform Act (which hasn’t gone anywhere), but is now looking into the industry’s biggest problem besides banking: federal cannabis income taxes. Specifically, an app IRC 280E. Even if Rep. Mace’s bill doesn’t pass, I’m glad to see her continue to fight, and now against IRC 280E.

IRC 280E is devastating to the cannabis industry

Banking headaches combined with the impact of IRC 280E are making the industry a killer. IRC 280E Arguably Worse Than Banking Issue Because Cannabis Business Can At Least Rely On FinCEN 2014 Guidelines and the financial institutions you follow to establish basic merchant accounts in most jurisdictions.

IRC 280E progress:

No deduction or credit shall be permitted for any amount paid or incurred during the tax year in the exercise of any trade or business if such trade or business (or activities comprising such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) that are prohibited by federal law or the law of any state in which such trade or business is conducted.

IRC 280E was passed by Congress in 1982 in response to A Issue The tax court ruled that a taxpayer could deduct expenses related to his sales of cocaine, amphetamines, and cannabis. Deductible expenses included packaging costs, travel, and even scales used to weigh illegal substances. Because cannabis is a Schedule I controlled substance, the IRS used IRC 280E to prevent cannabis businesses from deducting ordinary and necessary business expenses. The result is that cannabis companies face much higher federal tax rates than comparable companies in other industries. There are different opinions about the level of tax rates charged to marijuana businesses – from 40% to 70% to ARRIVE TO, TO GET TO 90% All higher than the standard corporate tax rate paid by most other corporations in the United States.

IRC 280E effect

The result of IRC 280E is that ordinary business expenses such as rent, AdvertisingEmployee salaries do not reduce taxable cannabis income unless it can be allocated to costs of goods sold (COGS). For cannabis growers, cost of goods sold typically includes expenses directly related to the production of the plants, such as the seeds, electricity, and labor that went into growing the flowers and preparing them for sale. For cannabis dispensaries and distributors, COGS is more restrictive, and generally only includes the amount they paid for the cannabis products they sell plus some additional allowance.

In recent years, the IRS has increased its outreach to the industry to try to ensure IRC 280E compliance. It even containscannabis industryon its website with industry questions and answers. It’s good that the IRS is generally willing to flag the cannabis business, but it doesn’t change the overall negative impact of IRC 280E. Federal courts have shown time and again that they have no desire to change IRC 280E and that it is Congress’s job to do so.

Mace’s IRC 280E bill

On December 30, 2022, Rep. Mays introduced her IRC 280E bill before the end of the 2022 congressional session. It will not proceed as written as a result of that, so she will have to reintroduce it accordingly for 2023. I could not find the full text of the bill Proposal, but its summary text It states that it serves to “amend the Internal Revenue Code of 1986 to allow deductions and credits for expenses related to marijuana sales made in accordance with state law.”

Will this be it?

Seems simple enough, right? Well, there’s a reason IRC 280E was never modified to accommodate the cannabis industry. This is because such an adjustment could have significant collateral damage to taxes related to illegal activities around Schedule I and II drugs. In addition, I suspect the IRS and the federal government are too eager to give up the massive gains that the IRC 280E has offered without full federal legalization first.

Of course, with properly designed language and as long as enforcement can do its job with the IRS, miracles can happen. Public sentiment would likely support such a measure to ensure that the democratic nation’s experiments continue without bankrupting the cannabis companies. But it is unlikely in my opinion. However, if and when Rep. Mace reintroduces this bill, I’ll be sure to analyze it and blog about it accordingly.


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