As lawyers, we were trained to spot injustice. Section 280E of the Internal Revenue Code is an injustice. For that reason, we have and will continue to write about why Section 280E should be repealed. New York lawyer/writer Anne Wallace recently wrote an article, Time to Repeal Section 280E, effectively arguing for repealing Section 280E. The article notes how Washington, Colorado, Oregon, Alaska and Washington DC have all legalized marijuana for recreational use and multiple other states have legalized it for medical use. Yet businesses seeking to operate under the new laws of these states (and DC) are blocked from taking a large number of normal business deductions. Wallace writes on how Section 280E’s disallowance of deductions can often mean the difference between profitability and failing for new cannabis businesses. Section 280E states:
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.
Since marijuana is still (wrongly) classified as a Schedule I narcotic, this means that cannabis businesses may not deduct their expenses incurred in selling marijuana. This in turn means that legal cannabis sellers who accurately report have their profits either greatly reduced or eliminated. This reduction in the potential return on cannabis selling also discourages investors from putting their money into marijuana businesses. And all this in the states where it is legal. As more states legalize and regulate recreational marijuana, 280E — at least as it pertains to marijuana — no longer makes sense. Congress needs to get together and either amend or repeal this misguided and woefully outdated section of the tax code. Legal marijuana and the reasonable and fair taxes that it generates should be encouraged. For more on Section 280E, check out the following: