When folks in the medical and adult use marijuana industries hear “280E,” they tent to shudder since they know it means a large protion of their revenues will be going to the IRS without the usual deductions. However, just this week, Grover Norquist, a GOP political advocate and the well-known president of Americans for Tax Reform (which favors repealing 280E), opined that our GOP-led Congress may enact sweeping tax reform this year that would reduce the stress of 280E on state-legal marijuana businesses by lowering corporate income tax rates.
In case you missed it, 280E is the provision of the Internal Revenue Code creates such an onerous tax burden for cannabis businesses because it provides as follows:
“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.”
Congress passed 280E in 1982 in response to a Tax Court ruling that a taxpayer could deduct expenses relating to his sales of cocaine, amphetamine, and marijuana. Deductible expenses included the costs of packaging, travel, and even scales used to weigh the illegal substances. This is no longer possible in the world of 280E.
Since cannabis is a Schedule I controlled substance, the IRS uses 280E to disallow marijuana businesses from deducting their ordinary and necessary business expenses. The result is that marijuana companies — regardless of their legality under state law –face higher federal tax rates than similar companies in other industries. There are differing opinions on the level of tax rates imposed on marijuana companies – from 40% to 70% to as high as 90% – all of which are higher than the 35% corporate tax rate paid by most other businesses in the United States.
But if Norquist’s predictions are accurate, there may be a bit of light at the end of the 280E tunnel for cannabis businesses. though if Norquist’s predictions are accurate. In an interview with MJ Business Daily, Norquist stated:
There’s a big tax bill this year – the tax reform package that takes corporate rates to 20% – which solves some of the problem for marijuana producers because now you’re paying 20% on all your sales instead of 35%. But we still need to get normal and reasonable and legal deductions made legal and normal for the marijuana industry, as well as for all other industries. Marijuana could get into that package if some of the libertarian Republicans made that a condition of voting for the whole package.
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So, as we build support for a fix, we need to build support state by state, where we say, “Look, you don’t want federal tax law used to gut the effectiveness of federalism. Because you could say something can be legal at the state level, but if the federal government is going to tax it into oblivion, you really haven’t allowed federalism at all.
Norquist then went on to predict these tax law changes will occur within the “next few years.” Though our cannabis tax lawyers do see cannabis tax changes coming, they are less confident than Norquist on timing. There has been no successful standalone 280E fix bill in Congress and the current presidential administration’s back and forth policies on marijuana legalization make predicting such federal action difficult. But with legalization in California and marijuana reform in 28 other states and more coming soon, the odds of Congress rectifying this tax situation are increasing. We cannot and should not expect favorable 280E changes from either the Tax Court or the IRS unless and until Congress mandates such changes. It is therefore good to know that such changes are at least on the table.