The Future of the Ordinary Business Deduction for Cannabis Businesses

Calyx CPA highlighted research from Joseph A. Peterson regarding how 280E has damaged the cannabis business and the arguments that companies possess constitutional rights to recover lost deductions.

Economic Impact

Medical and recreational cannabis sales could reach $33.6 billion, with an additional economic impact of $100.8 billion by 2023's conclusion.

Section 280E Overview

This provision disallows tax deductions for ordinary business expenses for enterprises involved in trafficking controlled substances, including cannabis. Cannabis businesses may only deduct Cost of Goods Sold (COGS), resulting in effective tax rates potentially exceeding 70%.

Impact on Cannabis Businesses

The 280E restriction creates financial hardship, limiting reinvestment capacity, hiring capabilities, and expansion potential. Reform proposals include The Small Business Tax Equity Act and state-level tax relief mechanisms.

Recent Developments

Two multi-state operators - Trulieve and Ascend Wellness Holdings - successfully filed amended returns claiming ordinary business expense deductions previously excluded under 280E. Trulieve obtained $113 million in tax refunds for 2019-2021, with both companies planning to file 2023 returns as standard corporate taxpayers.

Implications for the Industry

These amended returns have established precedent and generated industry attention, with anticipated IRS scrutiny and potential litigation.

Recommendations for Cannabis Businesses

Cannabis enterprises should contemplate filing amended protective returns to preserve refund rights if federal 280E policy changes.

Legal and Regulatory Context

The U.S. Supreme Court affirmed federal cannabis regulation authority under the Commerce Clause, while Justice Clarence Thomas and the DOJ have criticized 280E enforcement on medical cannabis sales.