Recent Court Dissent Shows Progress for Marijuana Companies
Currently, although many states have legalized marijuana, it is still illegal to sell the drug under federal law. Because of this, under tax code Section 280E, cannabis companies are not allowed to make any deductions in their filings with the IRS.
IRC Section 280E provides:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
In cities like Chicago and Denver, they are going even one step further and decriminalizing psychedelics. The business of psychedelics for therapeutic use could see a boom similar to the one that marijuana has seen in the past decade, due to its increasing acceptability.
In the case of Northern California Small Business Assistants, Inc. v. Commissioner of Internal Revenue, filed on October 23, 2019, by the U.S. Tax Court. While the court itself agreed with the IRS’s stance that was not entitled to claim normal business deductions, Judge Gustafson, dissented in part to argue that Section 280E is actually unconstitutional under the Sixteenth Amendment. The Sixteenth Amendment grants Congress to power to lay and collect taxes on “income, from whatever source derived.” Further, because the cannabis companies are not allowed to deduct expenses from running their business, the income from which they are being taxed is higher than it would be if it were any other business. This to Gustafson, is unfair and unconstitutional.
It will be interesting to see if Gustafson’s argument gains steam and later wins out in court in the coming years.
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