Businesses currently operating in the marijuana industry are well aware of a restrictive federal tax principal which limits the ability of recreational or medical marijuana business from deducting all ordinary and necessary business expenditures when computing taxable income. Fortunately relief might be on the horizon as a proposed bill in Massachusetts would allow cannabis businesses to take a state level deduction for the disallowed federal expenses starting in 2019.
The challenging federal IRC Tax Code §280E states that “no deduction or credit shall be allowed in running a business that consists of trafficking a controlled substance.” In 1970, in response to rampant drug hysteria and increased drug-related incarceration rates, Congress passed the Controlled Substance Act, whereby cannabis was included as a Schedule-1 controlled substance. As a result, the restrictive properties of §280E have seemingly left the modern legalized marijuana industry paying tax on their gross-revenue rather than their net-income (revenues less expenses).
In recent years, numerous businesses that are legally operating under various state’s laws, have challenged IRC §280E citing their state-legality, or have even proposed challenging the Controlled Substances Act to change the classification of cannabis. To date, nothing has garnished enough momentum. While federal repeal seems unlikely in the short-term, Massachusetts could become one of an increasing number of states that decouples from the federally restrictive IRC §280E. Massachusetts Bill H.2510 specifically states that taxpayers shall receive “a deduction for any amount paid or incurred during the taxable year in carrying on the trade or business of a marijuana … that would have been deductible under the Code, but for section 280E of the Code.” Cannabis businesses operating in Massachusetts should continue to monitor the progression of the bill.
Please contact S&G for any assistance you might require while navigating through the unique challenges of IRC §280E, as well as, any of the other complexities that exist in the marijuana industry; including, entity structuring, financing, business plans/operations, and tax planning and compliance considerations.