• Each Code sections[1] finish with a capital letter.
  • Each are in Subchapter B.
  • Each have to do with deductions.
  • Each treat particular sorts of firms differently than other people for no fantastic cause.
  • Each function separate/various trades or firms tests.

 

It is the final bullet that tends to make me wonder if or how §199A could influence the application of §280E in the future (assuming § 280E is not repealed and/or marijuana descheduled in the close to term).

A Incredibly (Incredibly) Short Obligatory Overview of §199A

The Tax Cuts and Jobs Act of 2017[2] decreased the corporate earnings tax price from a maximum graduated price of 35% to a flat 21%. In order to generate some parity involving the decrease corporate price and the prices applicable to pass-by means of types of organization, §199A was added. Section 199A offers an earnings tax advantage to investors in pass-by means of firms (e.g., partnerships and S corporations). Non-corporate investors may well (following navigating a minefield of thresholds and exclusions and re-inclusions and exceptions to exceptions) be eligible to claim a deduction of up to 20% of the “qualified organization income” earned by such pass-by means of firms (the “QBI Deduction”).

Separate Trade or Enterprise Considerations

There are quite a few intriguing situations that opine no matter if a taxpayer is engaged in a “trade or business”. Typically they revolve about the application of, or interplay involving, §§162 and 212. Even so, if you are in the legal marijuana sector (as opposed to gambling or investing your frozen bagel fortune) or you are attempting to make the most of the QBI Deduction, you may well be far more interested in no matter if you have two or far more separate and distinct trades or firms.

For the marijuana firms it can be really useful to ultimate profitability to have two separate trades or firms, hopefully one particular of which does not consist of trafficking in a controlled substance. This is since, in one particular of the couple of taxpayer victories in testing §280, the CHAMP[3] court held that:

Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or organization of trafficking in controlled substances. They do not express an intent to deny the deduction of all of a taxpayer’s organization expenditures basically since the taxpayer was involved in trafficking in a controlled substance. We hold that section 280E does not preclude petitioner from deducting expenditures attributable to a trade or organization other than that of illegal trafficking in controlled substances basically since petitioner also is involved in trafficking in a controlled substance.

To the extent that a marijuana organization taxpayer can establish two bona fide trades or firms, there is the possibility of deducting otherwise unallowable organization expenditures. So far couple of such marijuana organization taxpayers have met the two separate trade or firms bar.

Likewise, pass-by means of firms with tainted service earnings will be hunting to strategy into a two separate trade or organization situation in order to qualify for §199A advantages. Treasury released final §199A regulations in February. The preamble tends to make clear that the existence of two or far more separate trades or firms is primarily based on all of the information and situations. The preamble additional states that Treasury and the IRS count on that taxpayers claiming to have two or far more trades or firms will have separate or “separable” books and records—a thematic situation for taxpayer’s taking the separate trade or organization position in published §280E situations.

Tying It With each other

Till now, save for a couple of poultry farmers worried about accounting solutions,[4] no taxpayers other than marijuana organization taxpayers have flapped a lot about no matter if they have two separate trades or firms. It appears most likely that with §199A this situation will get exponentially far more interest and there will be far more controversy, published situations, and administrative guidance. As a outcome, a far more refined test will create. The two or far more trades or firms guidance that will stem from §199A appears most likely to influence two or far more trades or firms position in the §280E context—for much better or worse.


[1] All references to sections herein are references to the Internal Income Code (the “Code”) or Treasury Regulations (the “Regs.”).

[2] An act to offer for reconciliation pursuant to titles II and V of the concurrent resolution on the spending budget for fiscal year 2018, P.L. 115-97.

[3] Californians Assisting to Alleviate Healthcare Complications, Inc. v. Commissioner (CHAMP), 128 T.C. 173 (2007).

[4] Peterson Create Corporation v. United States, 313 F.2d 609 (8th Cir. 1963) Burgess Poultry Marketplace Inc. v. United States, 64-two USTC 93 (1964).