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The cannabis community has been waiting on bated breath to see how the newly inaugurated Biden-Harris administration will transform the cannabis industry.
Will things turn for the better, or will the status quo be maintained? Worse still, will Biden-Harris make things even more difficult for the nascent industry?
Specifically, many are wondering if the 280E headache will finally go away.
Let us digress briefly to the “Standing Akimbo” matter before the courts in 2020.
The IRS was investigating a legal cannabis business by Standing Akimbo for making illegal deductions when submitting their tax returns. The real issue here was that this company did not qualify to make such deductions since it was a “trade or business” whose operations “consisted of trafficking in controlled substances.”
The taxpayers lost the case. Or in other words, section 280 E was invoked.
What Exactly is 280 E?
These are a few lines in the Internal Revenue Code that considerably impact the bottom line of legal cannabis businesses in the US.
Here it is.
“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 or 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.”
In short, deductions or credits are not allowed for businesses engaged in the trade of any controlled substance (schedule I or II of the Controlled Substances Act). Initially, this legislation was enacted in the 1980s to stop a cocaine dealer from claiming tax deductions for his cocaine business.
As we all know, cannabis is a Schedule I substance. Consequently, legal cannabis businesses are affected by the same law.
A schedule I substance is one that, according to the DEA, has no known medicinal value while at the same time it has a high potential for abuse. The Controlled Substances Act (CSA) was created during resident Richard Nixon’s tenure to curtail the distribution and use of illicit drugs.
For “normal” business, federal tax is imposed on the net income; expenses have been deducted after business. This, of course, significantly reduces the amount of tax remitted.
The case is different for canna-businesses.
Cannabis being a schedule I substance means that cannabis businesses have to remit tax on their gross receipts. Such expenses include staff salaries, repairs and maintenance, rental fees, utility costs, and marketing expenses. In some cases, this may mean that such businesses are left with tax liabilities of up to 70% of their income.
Are There Any Exceptions?
There is a very minute reprieve for the legal cannabis business, as far as section 280E goes.
Despite the implications of this act, legal cannabis businesses are allowed to make tax deductions on the cost of goods sold (COGS). This applies to marijuana growers, wholesalers, and retailers. Such allowable expenses include the cost of the product, inventory costs, shipping costs, and other direct costs. No other expenses are allowed.
Section 280E has been a headache to many legal businesses in the industry as this significantly pushes the cost of conducting business. Others have argued that this is a biased leg-up for the black market since they can sell their goods at a lower price since they don’t have hefty taxes to remit. Consequently, cannabis supporters have concerted their efforts to push for federal reform to allow cannabis businesses to operate outside section 280E.
How Did Cannabis Get Bracketed in This Woeful Lot?
Cannabis is a schedule 1 substance, and therefore it automatically falls in the 280E category of businesses.
This only means one thing.
If 280E is to go away, cannabis has to be de-scheduled.
Will Biden-Harris De-schedule Cannabis?
Maybe, maybe not.
As it stands, Biden-Harris is not openly pro federal legalization.
Here is what they promised and still stand by during their presidential campaigns.
Democrats hold the belief that no one should be imprisoned because of non-violent drug use. Therefore, they hope to decriminalize marijuana use and consequently reschedule it at the federal level through executive action. As they will continue to support the legalization of medical marijuana, they still believe that states should make their own decisions about recreational use. Additionally, the Justice Department is discouraged from prosecuting for marijuana-related activities that are legal at the state level. Lastly, all past marijuana-related criminal convictions should be automatically expunged.”
A Bidden-Harris administration has promised many things to the
Unfortunately, making section 280E go away is not in the offing.
However, keep pushing.
You may never know!