Q & A Marijuana Tax, COGS, and §280E
There are issues that arise when taxpayers traffic illicit controlled substances and these controversies pertain to capitalization of inventoriable costs. This is a hot topic for tax payers and cannabusiness owners and operators need to determine the accurate cost of goods sold for 280E purposes.
Q: Do we have to change inventory methods to align with IRS 280E?
Answer: Taxpayers who traffic Schedule I or II controlled substances have to abide by §471 inventory policies as they were initially set up when §280E was passed. Taxpayers who are not using a non-inventory method properly will be subject to use an inventory method compliant with 280E Code.
Q: Why do medical marijuana businesses have to pay federal income tax if federal law considers marijuana a Schedule 1 Drug?
§61(a) does not distinguish between income made from legal sources and income made from illegal sources. Gross income is loosely defined with roughly 15 examples of what is considered includible in gross income. The Sixteenth Amendment authorizes Congress to collect taxes on income and under §61(a)(3) property dealings are subject to tax including controlled substances that are produced or gained for resale.
Q: As a taxpayer, how do I calculate my COGS? Gross income?
Begin with inventories, add current production costs or purchases, then subtract ending inventories. Find gross income by subtracting COGS from gross receipts. Find the taxable income by subtracting business expenses from the gross income.
Q: As a taxpayer, how do I calculate my COGS with regards to §280E compliance?
Determine deductibility by assessing business expenses. Make sure they are 'ordinary and necessary' by §162 standards and meet timing expectations §461. Find out the deductible amount and make sure the deduction handled appropriately: deferred, capitalized to asset, or disallowed.
Q: Why did Congress pass §280E?
Jeffrey Edmondson v. Commissioner, T.C. Memo 1981 -623
1981 Tax Court ruling allowed drug dealer to recover the cost of illicit substances from his drug trade operations and he was able to deduct drug dealing expenses including, rent, packaging, telephone, and care expenses because they were part of his operations.