Proposed Amendment to §280(E)

§280(E) of the Internal Revenue Code poses one of the more frustrating challenges for the legal marijuana industry. §280(E) 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) consist 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 any State in which such trade or business is conducted.

The impact of §280(E) is that marijuana businesses, even those that are in complete compliance with State regulations and laws, are not allowed to avail themselves of typical business tax deductions or credits.  This means that while many legal marijuana businesses generate high revenues, high profits do not often follow after the taxman takes his share.

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Representative Carlos Curbelo, a Republican from Florida’s 26th congressional district, along with Representative Earl Blumenauer, a Democrat from Oregon’s 3rd congressional district, sponsored H.R. 1810 – the Small Business Tax Equity Act of 2017 (“the Bill”), which tries to remedy the problems legal marijuana businesses encounter with §280(E).  The Bill seeks to amend §280(E) by adding the following clause at the end: “, unless such trade or business consists of marijuana sales conducted in compliance with State law.”  (emphasis added).  This language would allow legal marijuana businesses to enjoy ordinary business tax deductions and credits.

The Bill was introduced to the House on March 30, 2017 and was subsequently referred to the Ways and Means Committee.  While the Bill is still in committee, September has been a good month for the Bill, which has added seven new cosponsors: Rep. Ryan Costello (R-PA-6); Rep. Jason Lewis (R-MN-2); Rep. Tulsi Gabbard (D-HI-2); Rep. Tom Emmer (R-MN-6); Rep. Mark Sanford (R-SC-1); Rep. Matt Gaetz (R-FL-1); and Rep. Betty McCollum (D-MN-4).  The Bill presently has 34 cosponsors, including 23 Democrats and 11 Republicans (Rep. Barbara Lee, D-CA-13, joined as a cosponsor on October 3, 2017).  It also bears mentioning that an identical bill, sponsored by Sen. Ron Wyden (D-OR) and cosponsored by Sen. Rand Paul (R-KY); Sen. Michael F. Bennet (D-CO); Sen. Patty Murray (D-WA); Sen. Jeff Merkley (D-OR); and Sen. Al Franken (D-MN), was also introduced to the Senate on March 30, 2017 and referred to the Senate Committee on Finance.

Two other bills on this subject have been introduced and referred to committee – H.R. 1824 and H.R. 1834.  While these bills address marijuana tax issues, the bills – especially H.R. 1824 – seek significantly broader reform of marijuana laws and try to reconcile many broad federalism concerns.

We will check in with this Bill periodically to advise on any new developments.

Alex concentrates his practice on business litigation and counseling. Alex is the author of the New Jersey Cannabis Counsel blog where he tracks and analyzes developments in New Jersey’s efforts to legalize recreational cannabis and the potential impact on cannabis businesses in New Jersey. Alex is also a member of the New Jersey Cannabusiness Association.