This article was originally published on Hoban Law Group, and appears here with permission.
Internal Revenue Code Section 280E states “[n]o 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.” Unlike hemp and hemp products, marijuana and products derived from marijuana are subject to this section of the IRS Code.
This means that ordinary and necessary deductions that are afforded to businesses that do not participate in “trafficking” according the IRS, are not entitled to take deductions for advertising, labor, rent, administration, improvements, among other expenses that a “normal” business is entitled to take.
The IRS is actively enforcing IRS Code 280E across the country, which is resulting in marijuana operations paying substantial amounts of additional, unanticipated taxes, penalties, and interest. A reseller of marijuana is only entitled to deduct the Cost of Goods Sold (COGS) in arriving at taxable income, which means the price paid for the product and reasonable transportation costs to …