WHAT IS IRS RULE 280E?

Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.

Ask any established cannabis entrepreneur or operator to name their most challenging financial hurdles, and it’s likely they’ll respond with “banking relationships” and “280E”.

Most marijuana operations are running all-cash businesses because mainstream, national banking institutions are not willing to support a federally illegal industry. A small number of state-chartered banks and credit unions have offered financial services to compliant operations, but establishing these relationships continues to be a significant challenge for operators.

An equally frustrating financial challenge is IRS Tax Code 280E, which states that “no deduction or credit shall be allowed in running a business that consists of trafficking a controlled substance.” This archaic code impacts cannabis businesses across the nation, causing unnecessary fiscal and operational stress.

WHAT THE CANNABIS INDUSTRY SAYS

IRS RULE 280E HISTORY

Federally, cannabis is considered a Schedule 1 Controlled Substance alongside Heroin, LSD, and Ecstasy. In 1982, at the height of drug hysteria and increased drug-related incarceration rates, Congress created Section 280E of the Internal Revenue Code (IRC). This was in reaction to a court case in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses (such as rent, advertising and employee salaries), Congress created 280E to prevent other drug dealers from following suit (source).

Fast-forward to today; legitimate, state-legal businesses are building compliant operations to provide access to medical marijuana and adult-use cannabis, yet still have to face the burden of paying taxes for normal business expenses.

WHAT IS IRS Code 280E?

Here’s a summary of 280E and what it means for cannabusinesses today:

Intended to prevent drug dealers from claiming tax deductions for their;

•business expenses

•Interpreted to include state-legal cannabis businesses

•Reduction of deductions results in increased taxable income

•Marijuana companies face higher federal tax rates: 40 – 80% vs 21% corporate tax

From an industry outsider’s perspective, it may seem like the businesses of legal “weed” are swimming in profits. However, this code is making a huge portion of dispensary revenues susceptible to tax, hindering these licensed businesses from being able to invest in building improvements, pay raises, benefits, operational expansions, giving back to the community, and so much more.

What is Section 280E of the IRS Tax Code, and how does it affect Cannabis Businesses?

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As tax season officially concludes, many cannabis businesses are feeling the burden of Section 280E. In the 29 states plus D.C. where cannabis legal, businesses are legitimately growing it, selling it, and everything in between. The cannabis industry continues to grow and thrive as more states legalize medical or adult-use programs, creating new business opportunities and new jobs in their communities. But a little-known provision of the IRS Tax Code called Section 280E makes it difficult for these cannabis business owners to truly thrive. Imagine being taxed 3.5 times or higher than the normal business tax rate.

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CSA

CSA HISTORY

CSA SCHEDULES

IRS RULE 280E

CONTROLLED SUBSTANCES ACT

The Controlled Substances Act (CSA) is the statute establishing federal U.S. drug policy under which the manufacture, importation, possession, use, and distribution of certain substances is regulated. It was passed by the 91st United States Congress as Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970 and signed into law by President Richard Nixon.^[1] The Act also served as the national implementing legislation for the Single Convention on Narcotic Drugs.

The legislation created five schedules (classifications), with varying qualifications for a substance to be included in each. Two federal agencies, the Drug Enforcement Administration (DEA) and the Food and Drug Administration (FDA), determine which substances are added to or removed from the various schedules, although the statute passed by Congress created the initial listing. Congress has sometimes scheduled other substances through legislation such as the Hillory J. Farias and Samantha Reid Date-Rape Prevention Act of 2000, which placed gamma hydroxybutyrate (GHB) in Schedule I and sodium oxybate (the isolated sodium salt in GHB) in Schedule III when used under an FDA NDA or IND.^[2][3] Classification decisions are required to be made on criteria including potential for abuse (an undefined term),^[4][5] currently accepted medical use in treatment in the United States, and international treaties.

History

The nation first outlawed addictive drugs in the early 1900s and the International Opium Convention helped lead international agreements regulating trade.^[6][7][8] The Food and Drugs Act of 1906 was the beginning of over 200 laws concerning public health and consumer protections.^[9] Others were the Federal Food, Drug, and Cosmetic Act (1938), and the Kefauver Harris Amendment of 1962.^[10][11]

In 1969, President Richard Nixon announced that the Attorney General, John N. Mitchell, was preparing a comprehensive new measure to more effectively meet the narcotic and dangerous drug problems at the federal level by combining all existing federal laws into a single new statute. With the help of White House Counsel head, John Dean; the Executive Director of the Shafer Commission, Michael Sonnenreich; and the Director of the BNDD, John Ingersoll creating and writing the legislation, Mitchell was able to present Nixon with the bill.^[12]

The CSA not only combined existing federal drug laws and expanded their scope, but it also changed the nature of federal drug law policies and expanded federal law enforcement pertaining to controlled substances. Title II, Part F of the Comprehensive Drug Abuse Prevention and Control Act of 1970 established the National Commission on Marijuana and Drug Abuse^[13]—known as the Shafer Commission after its chairman, Raymond P. Shafer—to study cannabis abuse in the United States.^[14] During his presentation of the commission’s First Report to Congress, Sonnenreich and Shafer recommended the decriminalization of marijuana in small amounts, with Shafer stating,

[T]he criminal law is too harsh a tool to apply to personal possession even in the effort to discourage use. It implies an overwhelming indictment of the behavior which we believe is not appropriate. The actual and potential harm of use of the drug is not great enough to justify intrusion by the criminal law into private behavior, a step which our society takes only with the greatest reluctance.^[15]

Rufus King notes that this stratagem was similar to that used by Harry Anslinger when he consolidated the previous anti-drug treaties into the Single Convention and took the opportunity to add new provisions that otherwise might have been unpalatable to the international community.^[16] According to David T. Courtwright, “the Act was part of an omnibus reform package designed to rationalize, and in some respects to liberalize, American drug policy.” (Courtwright noted that the Act became, not libertarian, but instead repressionistic to the point of tyrannical, in its intent.) It eliminated mandatory minimum sentences and provided support for drug treatment and research.^[17] King notes that the rehabilitation clauses were added as a compromise to Senator Jim Hughes, who favored a moderate approach. The bill, as introduced by Senator Everett Dirksen, ran to 91 pages. While it was being drafted, the Uniform Controlled Substances Act, to be passed by state legislatures, was also being drafted by the Department of Justice; its wording closely mirrored the Controlled Substances Act.^[16]

Amendments, 1970-2017

Since its enactment in 1970, the Act has been amended numerous times:

1. The 1976 Medical Device Regulation Act.[18]

2. The Psychotropic Substances Act of 1978 added provisions implementing the Convention on Psychotropic Substances.[19]

3. The Controlled Substances Penalties Amendments Act of 1984.

4. The 1986 Federal Analog Act for chemicals “substantially similar” in Schedule I and II to be listed

5. The 1988 Chemical Diversion and Trafficking Act (implemented August 1, 1989 as Article 12) added provisions implementing the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances that went into force on November 11, 1990.

6. 1990 The Anabolic Steroids Act, passed as part of the Crime Control Act of 1990, which placed anabolic steroids into Schedule III[20]:30

7. The 1993 Domestic Chemical Diversion and Control Act (effective on April 16, 1994) in response to methamphetamine trafficking.

8. The 2008 Ryan Haight Online Pharmacy Consumer Protection Act[21]

9. The 2010 Electronic Prescriptions for Controlled Substances (EPCS) .

10. The 2010 Secure and Responsible Drug Disposal Act (effective on October 12, 2010), to allow pharmacies to operate take-back programs for controlled substance medications in response to the US opioid epidemic.[22]

11. The 2017 Protecting Patient Access to Emergency Medications Act (PPAEMA) amended Section 33 of the CSA to include DEA registration for Emergency Medical Service (EMS) agencies, approved uses of standing orders, and requirements for the maintenance and administration of controlled substances used by EMS agencies.[23]