Cannabis industry participants face a tough battle under a litany of regulations that may not change much in the near future. Transfer pricing rules must be considered and acted on properly to avoid even more tax problems for these businesses, say AB FinWright’s Simon Menkes, Abraham Finberg, and Rachel Wright.
Judge Learned Hand, who served on the US Court of Appeals from 1924 to 1951, once said, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” No group of people has taken Hand’s pronouncement more to heart than cannabis business owners, perhaps because no group of people has faced such a mountainous collection of taxes as has been placed on the backs of the cannabis industry.
Background on the cannabis industry
The most damaging tax provision on the federal side is Internal Revenue Code Section 280E, which states, “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 is conducted.”
This means that only the cost of goods, or adjusted basis in the inventory sold, that is an amount used to arrive at gross profit, can reduce income. But no other deductions are allowed—only the cost to produce or the cost of the product sold or resold can be deducted.
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