280E Enforcement

Updating a post from 2013, which reported that 280E was “Not Strictly Enforced.” First, the old post; then, some current reactions.

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280E — Not Strictly Enforced

https://newrevenue.org/2013/12/29/280e-not-strictly-enforced/

December 29, 2013 § Leave a comment

UPDATED April 20, 2016:  Code section 280E supposedly requires disallowance of all expenses other than cost of goods sold, but “[c]urrently, some IRS agents are accepting 280E allocations that disallow 20% to 25% of the expenses (other than Cost of Goods Sold).”  That only 25% quote comes from a publicly posted draft publication of the BOTEC Analysis Corporation, http://www.liq.wa.gov/publications/Marijuana/I-502/small_business_impact_statement/botec_white_paper_1.pdf.

Here’s an elaboration: “Based upon the current situation with IRS auditors, it might be reasonable to assume that Section 280E will reduce expenses available for deduction by 20%; so as a baseline we have entered the Section 280E Disallowance Rate at 20%. (This is an assumption wrought with issues that are beyond the scope of this paper.)”

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Here are some reactions from April 2016, in response to a question whether 280E is not strictly enforced now:

Rachel K. Gillette, a lawyer in Lafayette, Colorado, who has helped me understand things many times, writes:

“No, not in my experience. They are strictly enforcing 280E in most audits I’ve encountered, to say that if the expense is not related to production, it will likely be disallowed under 280E . They are following the 2015 Memo. Apparently, IRS Examiners here just got some training on MJ audits.

“BTW— an interesting issue has come up with regard to federally mandated benefits, like those under the Affordable Care Act now in effect in 2016.  Apparently, the IRS would disallow insurance provided to employees who work in the store (not related to production)— many businesses are required to provide this insurance or be penalized (50 or more employees). So if the feds will disallow the expense—the choice is have the expense taxed as income, or just take the penalty.   So silly this application of 280E against these regulated businesses….”

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James Thorburn, with the Greenwood Village, Colorado, law firm of Thorburn Walker, writes:

“Based upon what we are seeing in audits, the IRS is being very aggressive in its 280E enforcement.  In fact the latest is that the IRS is attempting to collapse the entity structure that dispensaries have created to isolate the 280E effect.  So, the strategy of creating multiple entities in the dispensary structure is coming under attack by the IRS.”

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Here’s more from the thoughtful 2013 BOTEC draft, http://www.liq.wa.gov/publications/Marijuana/I-502/small_business_impact_statement/botec_white_paper_1.pdf:

“Federal income taxes will have a much larger impact on pricing behavior, especially when we start to consider implications for IRC Section 280E. Retailers, unlike producers and processors, have many costs that might be disallowed for tax deduction purposes under this law provision. In theory, if Section 280E were to be strictly applied, the retail marijuana industry simply could not exist because the economics could not support income taxes calculated on gross margins. Under this theory, the excise tax the retailers pay to Washington would not be deductible.”

That 2013 point about taxes being nondeductible reflects the view that drove Washington to amend its excise tax to make sure it was not both (1) includible in income and (2) nondeductible. The IRS subsequently indicated that the Washington excise tax was not includible in income.  So the problem was solved federally.

Washington CPA Todd Arkley notes that the low amount found nondeductible in the 2013 material could arise from separate lines of business, “(yoga, health center, non-cannabis products, etc.) alongside your cannabis retail” that would throw off deductible expenses under the CHAMP case, http://www.ustaxcourt.gov/inophistoric/champ.tc.wpd.pdf, discussed at Newman, Joel S., CHAMP: How the Tax Court Finessed a Bad Statute. Tax Notes, Vol. 116, No. 10, 2007; Wake Forest Univ. Legal Studies Paper No. 1086692. Available at SSRN: http://ssrn.com/abstract=1086692.  My friend Matt Kumin was the lead attorney in the taxpayer victory in CHAMP.  http://www.mattkuminlaw.com.

A mild defense of 280E, or parts of it, starts here: https://newrevenue.org/2015/12/18/doles-exemplary-280e/

The statute and committee report are here: https://newrevenue.org/2013/03/13/marijuana-tax-code-section-280e-text-and-joint-committee-legislative-history/

 

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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