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 in conducted.
accounting that you can Trust
When Congress passed Section 280e, it feared possible constitutional challenges to the law. To prevent such challenges, it added an exclusion that allowed a deduction for the cost of goods sold even where the goods are illegal under federal law. “Costs of goods sold” is essentially inventory costs, including the cost of the product, the cost to ship it in and any directly related expenses.
The 'Cost Of Goods Sold' Exception
Why you need the Dope Tax Group
In short, Section 280e severely restricts what deductions cannabis companies may take as they must pay full income taxes. However, careful (and legal!) accounting can separate cannabis activities from unrestricted activities so that the taxpayer can claim some federal deductions. This is even before you consider state taxes and their unique deduction rules.