What exactly is IRS Code Sec. 280E?
Section 280E of the IRS Tax Code prohibits “drug trafficking organizations” from taking the normal and necessary expense deductions allowed to all other businesses. The original intent of the law was to prevent convicted drug traffickers from keeping their ill-gotten gains. However, the IRS is now applying 280E to dispensaries as part of the federal government’s campaign to end legal access to medical cannabis.
What does 280E mean to me as a dispensary operator?
You must take 280E into account when filing your federal income taxes. While there are different approaches to handing the issue, failure to address 280E in your income tax returns could leave you vulnerable to large back taxes and penalty. If you are being audited, how you handle 280E will in large part determine the size of your assessment. A failure to effectively plan for 280E could result in your receiving tax bills that are beyond your ability to pay, and ultimately lead to the closure of your dispensary.
How do I file taxes to best counter/handle 280E?
There are several strategies that can be used to meet the 280E challenge in your tax filings:
–– push as many costs as possible into Cost of Goods
–– demonstrate non-drug-trafficking activity
–– use dual legal entities
–– eliminate obvious cannabis references in returns
However, the only real and permanent solution to the 280E problem is convincing the IRS to change its position on medical cannabis.
How do I classify employees for best 280E coverage?
The basic strategy is to push as many staff members as possible into job classifications that fall outside the realm of drug-trafficking actions.
How do I write job descriptions to counter the negatives of 280E?
Job descriptions should be written to minimize references to any tasks that could be construed as drug-trafficking actions. Where drug-trafficking actions are unavoidable, they should be mixed with non-drug-trafficking tasks.
How do I plan my square footage usage to best counter 280E?
Square footage devoted to purely drug-trafficking activity should be minimized to the degree possible. When admission of drug-trafficking activities is unavoidable, drug trafficking usage should be mixed with non-drug-trafficking uses in the same space.
What should my response to the IRS be if I receive an audit or assessment letter?
Immediately contact an attorney with depth of expertise in 280E issues. All of the attorneys listed on this website have such expertise, and are participating in activist efforts to address the 280E problem.
Can the IRS go back to previous tax returns and apply 280E retroactively?
There is a three-year statute of limitations on IRS tax cases. If the IRS accepted your return at least three years ago, with no further action or questions, they cannot raise the 280E issue.
Do I face any possible criminal charges from any provisions of 280E?
280E is part of the civil tax code, and by itself cannot result in criminal charges. For criminal charges to be filed, the IRS must show an intent to evade taxes. As long as you honestly describe your business activities, and account for 280E in your tax returns, it should not lead to criminal charges.
How did 280E come into being?
280E was passed by the U.S. Congress in 1982, after the IRS brought a tax case against a convicted trafficker of hard drugs. The trafficker in response filed a tax return in which he claimed deductions for items such as the yachts he shipped his drugs in, the guns that were used to protect the shipments, bribes paid to foreign officials, etc. Because there was no regulation preventing such deductions at that time, the IRS was forced to accept them and the trafficker was able to retain a portion of his ill-gotten gains.
Congress reacted by passing 280E. It was never intended to apply to legal organizations that actually file federal income tax returns. It was intended to be applied to convicted drug traffickers.
What precedents have been set in tax court regarding 280E?
The 280E issue has only come in front of a judge once. That was an IRS Tax Court case from 1999. In that case, CHAMP, one of the earliest San Francisco dispensaries, argued that (a) 280E should not apply to a state-legal organization, and that (b) if it was found to apply, there should be an allocation between drug-trafficking expenses and non-drug-trafficking expenses. The IRS prevailed on the first issue when the judge ruled a state-legal distributor of medical cannabis would be considered a drug-trafficking organization under the federal Controlled Substances Act.
However, the judge also found that there should be an allocation between drug-trafficking expenses and other expenses. Because CHAMP provided a very extensive range of non-drug-trafficking services to its patients, the judge decided on an 85-15 percent allocation between non-drug-trafficking and drug-trafficking expenses. Put differently, the judge ruled that 85 percent of CHAMP’s expenses were deductible, and only 15 percent were non-deductible.
What type of legal advice do I need to handle 280E effectively?
280E is a remote and little-known section of the IRS Code. You should make certain that your accountant and tax attorney either have depth of expertise in 280E, or that they contact other professionals who do have such experience. One of the services provided by this website is professional forums, where your advisers can confer with other professionals who are developing 280E solutions.
How can I find a good tax lawyer with expertise in 280E?
We established this website to serve as a forum and meeting place for attorneys and other professionals with an interest and expertise in 280E. The best way to find an attorney with expertise in 280E is to select one from our list of attorneys with 280E expertise.
Will 280E force me into bankruptcy or closure?
280E has the potential to close down every medical cannabis business in the United States — including yours. There are indications that the IRS will use the Harborside case to re-argue the CHAMP case, and then use the ruling to deny all deductions for medical cannabis organizations. Of course, no business could survive for long if it were taxed on its gross revenue, including medical cannabis businesses.
What else should I do to meet the threat from 280E?
The best way to learn more about 280E, and find resources to manage an audit or tax assessment, is to check in regularly with this website. We will provide survival tools and strategies, as well as a community meeting place to focus our nationwide efforts to confront and defeat the threat that 280E poses to patients everywhere.
This website will be updated frequently with detailed 280E information for medical cannabis collectives and dispensaries. You can help fund this important effort by donating to 280E Reform.