Section 280E bars the Work Opportunity Tax Credit for a marijuana business

Plain-English summary

This Chief Counsel Advice answers whether a business that traffics in marijuana can claim the Work Opportunity Tax Credit (WOTC) under § 51 for wages paid to employees from targeted groups. The answer is no. Section 280E flatly disallows any deduction or credit for a trade or business that consists of trafficking in a controlled substance prohibited by federal law, and marijuana is a Schedule I controlled substance. Because the WOTC is a "credit," and the wages are paid in carrying on a marijuana-trafficking business, § 280E blocks the credit even if the employer otherwise meets every § 51 requirement. The advice cites Olive v. Commissioner to confirm marijuana's Schedule I status. This matters to the many state-legal cannabis businesses that still face § 280E's harsh federal treatment.

Ruling snapshot

• Question: Does § 280E prohibit a marijuana-trafficking business from claiming the § 51 Work Opportunity Tax Credit for wages paid?
• Outcome: Advice given (yes, § 280E bars the credit).
• Key authorities: IRC §§ 280E, 51; Controlled Substances Act (Schedule I); Olive v. Commissioner, 139 T.C. 19 (2012), aff'd, 792 F.3d 1146 (9th Cir. 2015).

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 202205024
       Release Date: 2/4/2022
       CC:ITA:B06:BEWESHNAK
       PRESP-101793-21

UILC: 280E.00-00, 51.00-00

date: November 30, 2021

 to:   Luke D. Ortner
       Senior Counsel
       (Small Business/Self-Employed), Denver, Group 3

       Mary Ann Waters
       Senior Counsel
       (Small Business/Self-Employed), Richmond

from: John P. Moriarty
Associate Chief Counsel
(Income Tax & Accounting)

subject: Denial of Section 51 Credit by Section 280E

       This memorandum provides Chief Counsel Advice regarding the application of §§ 51
       and 280E of the Internal Revenue Code. This advice may not be used or cited as
       precedent.

       Issue: Does § 280E prohibit a taxpayer from entitlement to the § 51 Work Opportunity
       Tax Credit (WOTC) for wages paid or incurred in carrying on a business of trafficking in
       marijuana?

       Conclusion: Yes, § 280E prohibits a taxpayer from entitlement to the § 51 WOTC for
       wages paid or incurred in carrying on a business of trafficking in marijuana.

       Facts:

       The taxpayer is an employer operating a business that is engaged in the trade or
       business of trafficking marijuana, a Schedule I controlled substance under the
       Controlled Substances Act. The taxpayer has hired and paid wages to individuals from
       one or more of the targeted groups provided under § 51, and is otherwise eligible for the
       WOTC but for the possible application of § 280E.

PRESP-101793-21 2

Law & Analysis:

Section 51 provides the rules regarding eligibility for the WOTC. The WOTC is a
general business credit available to employers for wages paid or incurred by the
employer during the taxable year to employees who are certified as members of a
targeted group by a designated local agency (sometimes referred to as a state
workforce agency). The WOTC is jointly administered by the Internal Revenue Service
(IRS) and the Department of Labor (DOL).

Section 280E provides:

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.

Marijuana is a Schedule I controlled substance under the Controlled Substances Act.
See Olive v. Commissioner, 139 T.C. 19, 38 (2012), aff'd, 792 F.3d 1146 (9th Cir.
2015).

Consequently, § 280E prohibits a taxpayer from entitlement to the § 51 WOTC for
wages paid or incurred in carrying on a business of trafficking in marijuana.

Please call Beverly E. Weshnak at (202) 317-7007 if you have any further questions.