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Ask Me Anything - Accounting, Tax or Regulatory Compliance for the Cannabis Industry in California

This came about after some discussion…

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I know that 280E is a pretty sore sticking point for most cannabis professionals. What businesses can claim exemptions from 280E, which cannot?

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Well said Jordan,

I do find it interesting that schedule 2 also falls under this yet I have never heard of a pharmacy that sales Vicodin or any of the others on that list as being subject to 280E.

There is really no exemption from 280E when it comes to cannabis – it is just a matter of documenting what and why you choose to put something in COGS.

For those who registered but couldn’t make the class I will be sending out a recording next week.

Thanks

Cyndi Finkenbinder, CPA

970-344-7298

www.alphaomega-acct.biz

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Cindy,

Your question is a good one, and the answer is as follows:

When a pharmacy sells anything that is Schedule 2, with a prescription it is a legal sale and by definition not subject to IRC Sec. 280E.

If the pharmacist or an employee to divert the Schedule 2 narcotics and make an illegal sale to someone without a prescription, by definition that would be subject to IRC Sec. 280E.

If DEA were to take cannabis off of Schedule 1 and move it to Schedule 2, than sales or medical or adult use would be legal sales and NOT subject to IRC Sec. 280E.

That raises the truly difficult questions:

What happens if DEA doesn’t take cannabis off of Schedule 1 and Congress passes a law saying that DEA will be “hands off” in states where cannabis is legal for medical or perhaps even adult use. My sense is in that situation there is a reporting position for Federal tax purposes that if the Feds say hands off, and it is legal in a state that IRC Sec. 280E should not apply certainly for medical and maybe for adult use.

The actual language in IRC Sec. 280E states “prohibited by Federal law or the law of any State in which such trade or business is conducted” which is disjunctive. Meaning that prohibited by EITHER. Notice what would happen if the OR was an AND.

The law is clearly continuing to evolve in this area.

Hope your webinar went well.

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Hunter,

If you ask anyone that has dealt with IRC Sec. 280E there are a couple of points that come across loud and clear.

The provision is incredibly complex and if there is one general rule, that would be that there is no general rule that I can articulate without some background. Even within our own materials, there are different ways to explain the provision.

Perhaps the most important background document that one needs to understand is the IRS Chief Counsel Memorandum which addresses How does a taxpayer trafficking in a Schedule I or Schedule II controlled
substance determine the cost of goods sold (“COGS”) for the purposes of §280E of the Internal Revenue Code (“Code”)? Which is CCM 201504011, which is a MUST READ to understand the background in this area.

The first items we have made available concerning IRC Sec. 280E include

I trust this may not be as satisfying as a two-word answer, but it is the starting point for jumping into this area.

@AlphaOmegaAccounting has a listing for a seminar on IRC Sec. 280E which would be a great way to start learning about IRC Sec. 280E.

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