Forbes.com: Internal Revenue Code “Section 280E provides that ‘no deduction is allowed for any amount incurred in a business that consists of trafficking in controlled substances.’ Because marijuana finds itself on Schedule I of the Controlled Substances Act, the IRS has the ammunition necessary to deny the deductions of any facility that sells the drug. And it does. Regularly. On Friday, the IRS released Chief Counsel Memorandum 201504011, which sheds some interesting new light on what expenses a seller of marijuana businesses may and may not deduct, but in order to understand the memo’s impact, we’ve got to take a tour through several Internal Revenue Code provisions – namely Sections 61, 471, and 263A — and understand how they interplay with Section 280E.”
The following questions and answers are from Chief Counsel Memorandum 201504011:
(1) How does a taxpayer trafficking in a Schedule I or Schedule II controlled substance determine cost of goods sold (‘COGS’) for the purposes of §280E of the Internal Revenue Code (‘Code’)?
(2) May Examination or Appeals require a taxpayer trafficking in a Schedule I or Schedule II controlled substance to change to an inventory method for that controlled substance when the taxpayer currently deducts otherwise inventoriable costs from gross income?
(1) A taxpayer trafficking in a Schedule I or Schedule II controlled substance determines COGS using the applicable inventory – costing regulations under §471 as they existed when §280E was enacted.
(2) Yes, unless the taxpayer is properly using a non-inventory method to account for the Schedule I or Schedule II controlled substance pursuant to the Code, Regulations, or other published guidance.