Entrepreneurs involved in the cannabis industry still face a number of obstacles, such as cannabis banking woes and tax burdens. For the owners of one medical cannabis dispensary in Colorado, confusion regarding IRS tax code 280E has cost them a hefty fee. 

Breckenridge-based dispensary Alpenglow Botanicals was rejected a tax deduction, meaning that the company’s owners Charles and Justin Williams must now fork out $53,094 to the Internal Revenue Service (IRS).

The Williams’ took their case to a high court, where they were dismissed by judges who deemed that no credit or tax deductions can be granted to companies involved with “trafficking in controlled substances.” 

According to the judges, Section 280E of the federal tax code does not exempt cannabis businesses from being investigated by the IRS. The IRS ruling states that the cannabis company owners are in violation of federal criminal drug laws. 

Why? Currently, the cannabis plant is still a Schedule 1 drug under the Controlled Substances Act (CSA) and this will not change until the federal government’s stance on weed changes. Due to cannabis’ Schedule 1 classification, licensed businesses must submit their federal taxes in accordance with IRS tax code 280E. 

IRS ruling affirmed by high court because cannabis is a controlled substance

Running a cannabis company in the States often requires a generous amount of capital; the standard corporate tax rate for cannabis businesses currently rests at 70 percent. Sometimes, the figure is even higher. Companies that operate outside of the cannabis industry must pay 35 percent tax on corporate income.

Numerous business tax deductions were filed by the Williams’ but unfortunately, Alpenglow’s owners were turned down and instead, slapped with a bill of $53,094 payable to the IRS. The 280E cannabis tax case ruling was announced by judges from both the Colorado-based U.S. District Court in Colorado and the Denver-based 10th Circuit Court of Appeals. 

Despite the fact that the IRS has already received full payment from the cannabis dispensary owners, they did not hesitate to submit a refund claim. The claim is ongoing and if it is successful, cannapreneurs in Colorado and the rest of the U.S. could soon gain relief from the dreaded 280E tax provisions.

What is 280E and why should cannabis business owners be aware of it?

Since cannabis remains illegal at the federal level, the IRS prevents the vast majority of cannabis companies from making tax deductions on their total corporate income. Companies who conduct cannabis “trafficking” activities must be treated the same as dealers of other controlled substances, say the IRS.

Section 280E of the tax code was initially passed back in 1982 after a cocaine dealer triumphantly deducted corporate expenses associated with his illicit narcotics business. In order to stop this from happening again, IRS code section 280E was enacted by Congress. Although this may seem like a wise solution, it makes the prospect of conducting business in the cannabis industry very difficult indeed.

With such complicated cannabis tax laws in place, companies operating in the nascent industry are feeling neglected in comparison with entrepreneurs operating in other industries. Until Section 280E is eliminated, cannabis companies will struggle to compete with businesses in other legal avenues that are being given fair financial opportunities.