Sometimes the best place to hide something is in plain sight. That’s what Congress did in December when they passed the tax reform. In plain sight they (inadvertently?) muted the impact of 280E for corporate taxpayers.
How? Why? Because Congress lowered the corporate tax rate to 21%. IRC 280E denies deductions for costs associated with “trafficking in controlled substances,” which includes marijuana because it is still listed as a Schedule I substance under the Controlled Substances Act. Consequently, unless business expenses can be included in the cost of goods sold (COGS), expenses incurred in a cannabis-related business are not deductible when computing federal taxes. This rule presents a material tax problem for retailers, though other cannabis-related businesses can certainly be caught in this web.
By lowering the Federal corporate tax rate to 21% from 35%, the law now reduces the impact of the IRC 280E expense disallowance to about 60% of what it was prior to January 1 of this year. For example, a C corporate taxpayer who had $100X of net income after $30X of IRC 280E disallowance would pay tax of $35X last year. That same taxpayer with the identical income now pays tax of only $21X, muting the impact by 21% of the disallowed expense.
Taxpayers organized as C corporations don’t need to do anything except celebrate. Taxpayers organized as flow-through taxpayers, such as subchapter S corporations and LLCs taxed as partnerships, should look at their 280E exposure and consider whether restructuring might make sense.