Tax laws can be challenging for any business, but particularly for the state legal marijuana industry. Please contact the Robison Law Group to discuss the Internal Revenue Code and your specific tax concerns and considerations.
Let’s take a moment and highlight the importance of COGs and 280E in the state legal marijuana industry. Because of Section 280E of the Internal Revenue Code, cannabis (marijuana and) businesses and other entities have a challenging time understanding what is capitalizable or not. Having experienced and well-trained tax counsel is important to your success. IRC § 280E is highly relevant to certain participants in the marijuana industry. IRC § 280E affects the taxability and, accordingly, profitability of certain businesses in the industry. Mr. Robison has an LL.M. in Tax Law from Georgetown Law.
Under IRC § 280E:
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.
A strict interpretation of IRC § 280E prohibits a marijuana business from deducting anything, including salaries, wages, employee benefits, training, rent, travel, security and inventory purchases. In effect, such a business would be taxed on its gross profit and not its net profit, creating the potential for taxation on losses.
In practice, the IRS is interpreting IRC § 280E, pursuant to IRS Chief Counsel Advisory 201504011 (“CCA 201504011”), released January 2015. CCA 201504011, considers what may be included in the cost of goods sold (“COGs”) for producers and resellers in the business of trafficking in controlled substances. It concludes, in part, that taxpayers should determine cost of goods sold using the applicable inventory regulations under IRC § 471 as they existed when IRC § 280E was enacted and generally may not include the additional costs covered by IRC § 263A.
COGs are to be determined, “using the applicable inventory-costing regulations under 471 as they existed when 280 was enacted.” According to the IRS, these regulations are Treas. Regs. § 1.471-3(b) for resellers and Treas. Regs. §§ 1.471-3(c) and 1.471- 11 for producers such as cultivators or processors.
When a taxpayer accounts for a dispensary, follow Treas. Reg. § 1.471-3(b). In a dispensary, only the COGs may be utilized to “lower” gross income. So, rent is not deductible, payroll is not deductible, utilities are not deductible among most other items of expense. When a taxpayer accounts for a cultivation facility, (not “trafficking”), use Treas. Regs. §§ 1471-3(c) and 1.471- 11. The majority of a cultivator’s expenditures should be COGs and, therefore, tax deductible.
Robison Law Group has in-house tax expertise as well as strategic relationships with qualified tax attorneys and other tax professionals in the cannabis space. If you have questions about federal, state, or local tax laws, our lawyers may help you find the answers and keep your business or other cannabis or organization compliant with state and federal tax laws and improve your tax position.
Please contact the Robison Law Group to discuss IRC § 280E.
Robison Law provides advice and counseling to cannabis organizations on the following matters:
- IRS § 280E
- Cash Transactions, Form 8300
- Tax Consequences of Distribution and Allocation Provisions of an Operating Agreement
- Partnership Capital
- Profit versus Capital Interests
- Employee Incentive Plans
- Business Structures
- Tax Elections
- Subchapter S
We have deep experience counseling on sophisticated transactional matters. Drawing on our expert knowledge of the cannabis industry, we advise clients from deal initiation through contract negotiation, review and drafting. Our core experience includes a wealth of work product on intellectual property and corporate deals.
Cannabis is a highly regulated industry, with rapidly evolving federal and state rules touching every aspect of our clients’ business. We offer up-to-the-minute knowledge of those regulations and we provide legally sound and practical advice on how to ensure compliance. With the enactment of the 2018 Farm Bill, compliance related to hemp, CBD and other cannabinoids remains nuanced and critical to your success.
Marijuana and hemp are growth industries that have attracted sophisticated investors, who require a detailed understanding of the field’s evolving legal framework before they commit financing. We counsel investors and prospective investors on the unique legal, financial, and tax issues that face cannabis businesses.