IRS Uses 280E to Go After State Legal Cannabis Businesses on Taxes

shutterstock 158874281
shutterstock 158874281

The complex issue of cannabis taxes just got a bit more confusing for some Colorado businesses.

The IRS has started audits on cannabis businesses in Colorado even though these companies have not violated any state regulations. James Thorburn, a tax attorney in Colorado, represents clients in the cannabis industry that have been targeted.

“The IRS is being very aggressive towards marijuana businesses. [They’ll be auditing] pretty much everybody in the industry,” Thorburn told INC. “It’s now just a matter of time.”


These new audits have focused on taxable income from 2013-2014. Section 280E of the tax code addresses businesses that work in distributing Schedule I and Schedule II substances. Only deductions based on the costs of goods sold can be claimed under 280E.

Thorburn states that a 280E audit is a civil issue. The IRS can only impose a 280E penalty after it is established that a taxpayer has been “illegally trafficking in a controlled substance.” With cannabis still illegal on a federal level the IRS can likely make their case easily.

INC. spoke with the founder of a cannabis Denver-based cultivator. He wished to stay anonymous but described his own tax situation. He claims to have been audited by the IRS for misfiling Form 8300 (cash deposits over $10,000) and for violating Section 280E. “Most of the top 100 marijuana companies in Colorado are being ‘randomly’ audited,” the founder said. The company is considered to be in good standing with Colorado’s Marijuana Enforcement Division.

No one is certain yet as to why exactly the IRS is targeting state sanctioned businesses. “We don’t know the reason. It could be political, it could be enforcement, but it’s aggressive enforcement,” says Thorburn.

In 2014, Congress voted to defund the Drug Enforcement Agency from prosecuting state legal cannabis businesses. However this action did not address the tax code and section 280E.

Those working in legal cannabis, members of Congress, and financial institutions all have a stake in seeing the laws cleared up. Businesses still are cut off from the banking system and important tax deductions are not available.  The outcome of the Colorado cases are “important because if 280E is implemented the way IRS is trying, the taxes are so severe that the industry couldn’t withstand the taxes that are imposed,” Thornburn said. “We are hopeful that these taxes are not enforced.”