Section 280e prevents cannabis businesses from deducting business expenses when filing taxes, including cost of goods sold. It taxes cannabusinesses on their gross profit, unlike normal businesses that can deduct operating costs and expenses under section 162 of the Internal Revenue Code.
Introduced by Congress in 1982, section 280E responds to a case where a cocaine dealer successfully claimed deductions. To prevent illegal drug dealers benefiting from deductions, 280E disallows deductions/credits for businesses trafficking controlled substances. As cannabis remains federally illegal, legal state cannabis businesses pay more overall profits in taxes due to 280E.
The main challenge with 280E is maximizing allowed deductions each taxable year. Most IRS cases against cannabis companies involve dispensaries. As legislation moves slowly, 280E hurts legal cannabis businesses unable to deduct reasonable expenses.
Exploring the Impact of 280E Tax in Michigan
What is the 280E tax in Michigan? Typically, this allows the business to have less tax liability, thus lowering the tax amount the business pays. However, 280E greatly restricts the tax deductions of state-legal marijuana businesses.
Regardless of IRC Sec. 280E, all businesses may subtract the "cost of goods sold" for federal tax purposes, and that subtraction is subsumed in the initial gross income calculation that is the basis of the Michigan income tax return.
When calculating taxable income for Michigan income tax purposes, businesses operating with an adult use license under the Michigan Regulation and Taxation of Marihuana Act may decouple from 280E, and are allowed a deduction for ordinary and necessary business expenses.
Why Section 280E Exists
Why does 280E exist? Section 280E came about in 1982 following an almost unbelievable case in which a drug dealer sued the federal government in civil court, a case known as Edmondson v. Commissioner. In that case, Jeffrey Edmondson attempted to claim tax deductions for the year 1974 on "ordinary and necessary business expenses" associated with his criminal activity, including the cost of the drugs, his phone plan, and travel throughout the U.S.