Enacted in 1982 in response to a U.S. Tax Court case that allowed a drug dealer to deduct expenses in connection with his illegal activities, Section 280E provides:
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.
Thus, Section 280E prohibits any trade or business that consists of ”trafficking” in controlled substances from deducting or taking credits for any amounts paid or incurred during the taxable year. The U.S. Tax Court has interpreted “trafficking” by reference to the verb “traffic,” denoting engagement in regular commercial activity, which includes legal distribution of medical cannabis to consumers under state law.
This is commonly interpreted to mean that cannabis businesses may not deduct necessary costs (other than Cost of Goods Sold or COGS) in calculating gross income for federal tax purposes. The Section 280E prohibitions impose additional economic strain on cannabis businesses that are operating in an already highly regulated and competitive market.
Ultimately, it appears the only way out of this impasse, and overturn 280E, is for members of the House and Senate to support the federal legalization of cannabis. Unless Section 280E is repealed or Cannabis is legalized at the federal level, businesses ”trafficking” in cannabis (whether legally or illegally at the state level) must still calculate gross income without the benefit of business deductions prohibited by Section 280E.
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