280E Tax Planning
The application of marijuana taxation disallows (under IRS 280E) any deduction for ordinary and necessary business expenses for illegal controlled substance businesses. However, cost of goods sold (COGS) is not considered an expense, but rather an adjustment taken into account in arriving at gross income. Under Treasury Reg. Sec 1.471-6(a) and -11, inventoriable costs include all direct (e.g., the cost of inventory and delivery, and the cost of materials and labor for manufactured inventory) and indirect production costs (i.e., rent and utilities related to inventory). Taxpayers should be diligent in maximizing the proper expenses that should get allocated to inventory, and ultimately, COGS.
Another area of planning might focus on the CHAMP approach by separating the non-IRS Section 280E expenses from the non-deductible “trafficking in controlled substances activities”.
From a state tax planning perspective, the difference between the federal and state tax treatment of expenses under IRS Section 280E should not be forgotten. For example, Colorado specifically allows for a state tax deduction of IRS Section 280E expenses (through proforma tax returns), thus reversing the federal disallowance. The ever evolving state tax laws should always be consulted to determine whether these otherwise non-deductible expenses can be expensed for state tax purposes.
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