Companies that grow, produce, or sell Schedule I or II controlled substances are generally prohibited from deducting necessary and ordinary business expenses under Section 280E of the Internal Revenue Code. This prohibition has primarily affected the cannabis industry, as marijuana remains a Schedule I drug under the federal Controlled Substances Act, although its sale is legal in a majority of states.
What Are the Financial Implications of a Section 280E Tax Bill?
The financial implications of receiving a Section 280E tax notice can be severe. If the notice covers multiple tax years and your business has been operating for an extended period, your tax obligation could be in the hundreds of thousands of dollars.
This is because Section 280E provides that necessary and ordinary business expenses are not deductible. These expenses include rent, payroll, and many other business-related expenses.
A simple example is as follows:
A business not impacted by Section 280E has gross revenues of $1 million and gross income of $400,000. If the ordinary business expenses are $300,000, then the business would pay tax on $100,000 of income and owe approximately $30,000 in federal taxes.
However, a business subject to the Section 280E limitation would not be permitted to deduct the $300,000 in expenses and would pay approximately $105,000 in federal tax, a $75,000 difference and more than the net revenue generated by the business.
If a business has several years of tax returns that need to be amended due to a Section 280E notice, you can see the severe tax liability that could result.
The Highland Tax Group can help you clean up any past tax issues and challenge any determination made by the IRS related to Section 280E if warranted.
Highland Tax Group Has the Experience You Need To Handle a Section 280E Tax Notice
Dealing with a Section 280E notice can be stressful. You need a strong, experienced team by your side to guide you through the process and, if necessary, negotiate a positive outcome. Contact the Highland Tax Group to discuss your case with a member of our qualified tax team today.