Marijuana Business and Sec. 280e: Potential Pitfalls for Clients and Advisers
Jeffrey Gramlich & Kimberly A. Houser, Marijuana business and Section 280E: Potential pitfalls for both clients and advisers. 46 The Tax Adviser 524-533, 2015
11 Pages Posted: 21 Apr 2020
Date Written: 2015
As of this writing, 23 states and the District of Columbia permit the sale of medical marijuana, and four states permit recreational use of the drug. However, because marijuana is still classified as a Schedule I controlled substance, its sale remains illegal under federal law.
Taxpayers that engage in illegal activities are allowed to deduct otherwise allowable expenses incurred in the activity in calculating taxable income unless a specific provision prohibits a deduction for the expenses.
Sec. 280E, enacted well before any states had legalized marijuana, prohibits the deduction of expenses incurred in a business of trafficking in a controlled substance; therefore, the businesses selling marijuana generally cannot deduct their expenses. However, this prohibition does not apply to deductions for costs of goods sold.
Businesses that sell marijuana and also engage in other activities that do not involve the sale of marijuana may be able to take all otherwise allowable deductions for these other activities.
It is currently unclear whether CPAs could face federal criminal prosecution for providing tax services to businesses in states where it is legal to sell marijuana and whether doing so violates state codes of conduct for CPAs.
Keywords: 280E, Marijuana Tax Law
JEL Classification: K34
Suggested Citation: Suggested Citation