There is not too much to say about the Tax Court’s latest decision involving a marijuana company. In Loughman v. Commissioner, T.C. Memo 2018-85, the operators of a Colorado marijuana dispensary argued that for a marijuana dispensary operating as an S corporation, Section 280E discriminates against S corporation shareholders by double taxing income when shareholder salary is disallowed pursuant to Section 280E as a deduction from flow-through S corporation income and also included on the shareholder’s individual tax return as W-2 wages. The Tax Court noted that the regime was not discriminatory, but rather applied equally, because Section 280E disallows salaries not attributable to cost of goods sold whether or not the salaries are paid to the shareholder.
One of the harsh realities of operating a marijuana business is that Section 280E creates double taxation for owners who receive payments for services from marijuana companies. It would seem the only way to avoid this is if the owner’s sole responsibility is activities related to the production of inventory. However, any officer/owner’s responsibilities are bound to include some sort of management and oversight. While making an election to be taxed as a C corporation can minimize the cost of double taxation in this situation, it won’t eliminate it.
The Tax Court has shown little sympathy for marijuana companies when it comes to the harsh realities of Section 280E. The court notes that the taxpayers can elect to be taxed as any type of entity and also elect to operate in any line of business. Simply, in order to avoid double taxation caused by Section 280E, you are advised to operate a business not subject to Section 280E.