[Noozhawk’s note: This article is presented for information purposes only and is not to be construed as tax or legal advice. Readers should seek the counsel of competent experts in the legal and accounting professions for advice on their specific situation.]
Recent permits for cannabis dispensaries in Santa Barbara offer some compelling opportunities, both for cannabis operators and for consumers in our market. However, the challenges presented by IRS 280E and additional California taxation for the cultivation and excise taxes are formidable.
Operators need to understand their available options regarding these complexities to reduce taxes and increase potential profitability.
IRS 280E is a law passed by Congress that requires any business or individual generating revenue from operations involving Schedule I or Schedule II drugs to pay taxes on every dollar of revenue generated.
As they say, there are two certainties in life — death and taxes. The IRS, even if the revenue is illegal according to federal law, wants its money.
The key challenge with Section 280E of the Internal Revenue Code is that it forbids businesses from deducting otherwise ordinary business expenses, such as employee salaries, rent and utilities from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.
The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance.
Section 280E is a throwback from President Ronald Reagan’s administration, and originated from a 1981 court case in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses.
In 1982, Congress created 280E to prevent other drug dealers from following suit. It states that no deductions should be allowed on any amount “in carrying on any trade or business if such trade or