Report – The Tax Advisor: Legal hemp and deductible expenditures


Here’s the introduction to their piece

For decades, cannabis, derivatives of cannabis, and connected substances such as hemp and marijuana had been classified as Schedule I narcotics beneath the 1970 Controlled Substances Act. Federally, the production and sale of marijuana have been and stay illegal, despite the fact that a marijuana small business remains obligated to spend federal earnings tax on its taxable earnings beneath Sec. 61(a).

Sec. 280E limits earnings tax deductions for firms that site visitors in controlled substances. The origin of Sec. 280E dates to 1981 with the Tax Court case Edmondson,T.C. Memo. 1981-623. The court decided that a seller of cocaine, amphetamines, and marijuana could deduct most of his price of goods sold (COGS) packaging, telephone, and automobile expenditures and a portion of his rental expense of his residence, all relating to the seller’s illegal business.

In 1982, Sec. 280E was enacted to reverse the Edmondson decision and deny sellers of Schedule I or II controlled substances the proper to deduct small business expenditures. Considering the fact that marijuana is classified as a Schedule I drug, marijuana firms are unable to deduct most ordinary small business expenditures. Nonetheless, COGS is allowable as an adjustment to gross receipts.

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