Edmundson v. Commissioner is a landmark case in the history of US tax law. The case involved Jeffrey Edmundson, who was in the business of selling amphetamines, cocaine, and marijuana. The IRS assessed his income when he was arrested for drug trafficking. Edmundson claimed that he was entitled to certain tax deductions related to his illegal drug trafficking business. The tax court allowed Edmundson to deduct all expenses except for those he could not substantiate. Clearly, this did not sit well with the federal government—allowing an illegal drug trafficker to be able to deduct expenses.
It’s worth noting that the Edmundson case predates the enactment of IRC 280E, which disallows deductions and credits for businesses engaged in the illegal sale of drugs. However, it’s widely considered to be a precursor to the law’s eventual passage. Prior to 280E, drug dealers were able to deduct many of their business expenses, just like any other business owner. This meant that they could effectively reduce their taxable income, despite the fact that their business was illegal. The federal government saw this as an unacceptable loophole and sought to close it by enacting 280E.
Under 280E, businesses that engage in the sale of illegal drugs are only able to deduct their cost of goods sold (COGS). This means that they cannot deduct any other expenses related to their business, such as rent, wages, or advertising costs. The rationale behind this law is to prevent drug dealers from benefiting from the tax code and to discourage the sale of illegal drugs.
While IRC 280E was initially aimed at illegal drug trafficking businesses, its scope has since expanded to include businesses that sell legal cannabis in states where it is legal. This has created a significant burden for cannabis businesses, which are unable to deduct many of their ordinary business expenses.
For more information on how we can help your cannabis business succeed with navigating IRC § 280E, call us today at 833-CPA-CANA or 833-272-2262.
Sandy Suchoff, CPA is the Founder and principal of Lefstein-Suchoff, CPA & Associates, LLC D/B/A The Canna CPAs. Suchoff has been featured and interviewed on MSNBC, FOX News, and Tune In Business Talk Radio as a tax advisor, as well as ONR Oklahoma PBS TV, Chasing News on FOX & WOR, KRQE 13, Cannabis Radio, Purple Haze Radio, and Cannabis Tech & Today as an advisor on cannabis tax and accounting.