The cannabis industry is facing an ongoing tax dilemma, particularly regarding Section 280E of the Internal Revenue Code, and a recent warning from the IRS suggests that businesses hoping for tax relief may be in for a rude awakening.
What is Section 280E? Section 280E prohibits cannabis businesses, and others involved in federally illegal drug activities, from deducting most business expenses from their taxable income. This leaves companies paying disproportionately high taxes compared to other industries, even in states where cannabis is legal. The only limited exception is the cost of goods sold (COGS), which companies can deduct.
Recent Developments on Cannabis Rescheduling Recent buzz around the potential rescheduling of cannabis from a Schedule I to a Schedule III substance under the Controlled Substances Act has sparked hope among cannabis businesses. If the Drug Enforcement Administration (DEA) follows through with this recommendation, 280E would no longer apply to cannabis companies. However, according to IRS Senior Counsel Luke Ortner, businesses should not jump the gun and assume that 280E is no longer in effect.
During a recent meeting of the American Institute of Certified Public Accountants (AICPA), Ortner made it clear that the IRS remains committed to enforcing Section 280E. He stressed that “there is no end run around the application of 280E,” and businesses that underpay or withhold taxes based on assumptions of future changes are setting themselves up for failure. In fact, those businesses may face asset seizures, increased audits, and possible litigation.
Why Betting on 280E Relief in 2024 is Risky Although the DEA may reschedule cannabis, experts like Nick Richards, a former leading trial attorney for the IRS, caution that it won’t impact the 2024 filing season. Even if a decision is made by the end of the year, it is unlikely to take effect before 2025.
Additionally, tax professionals are uncertain whether any potential relief will be retroactive. Daniel Corsaro, a tax law expert, suspects that if cannabis is rescheduled in 2024, the tax changes would apply only from the date of the decision, not retroactively from January 1.
What Cannabis Companies Are Doing Some companies, like Florida-based multistate operator Trulieve, are already attempting to navigate the uncertain tax landscape. Trulieve has filed amended federal tax returns for the past three years and received a $113 million federal refund. However, the IRS has made it clear that amended returns seeking refunds for taxes paid under 280E are “not valid,” and businesses attempting to recoup taxes could face future IRS scrutiny.
The IRS recently stated that it is taking steps to address such claims. If companies like Trulieve are found to have improperly claimed refunds, they could face litigation to repay those funds.
The IRS’s Stance: Proceed with Caution The IRS is not likely to overlook companies that prematurely ignore Section 280E, even as cannabis laws evolve. As the agency can audit returns within the past three years, it’s clear that taking shortcuts could lead to serious repercussions, including increased audits and extended tax assessments.
Businesses in the cannabis industry should carefully monitor developments but continue to comply with current IRS guidelines regarding 280E. Making premature assumptions could lead to heavy financial consequences, including asset seizures and significant tax liabilities.
Conclusion: Stay Informed, Stay Compliant The potential rescheduling of cannabis is a positive step for the industry, but businesses must remain cautious until official changes are enacted. Section 280E remains in full force, and taking shortcuts could result in significant financial penalties. As the situation develops, cannabis businesses should seek professional tax guidance to ensure they remain compliant with the current tax code while preparing for any future changes.
Key Takeaways:
- Section 280E is still in effect, and the IRS has no plans to relax its enforcement.
- Rescheduling cannabis may provide relief, but it is unlikely to occur in 2024.
- Companies filing amended returns to claim refunds for 280E-related taxes are at risk of audits and legal challenges.
- Cannabis businesses should remain compliant with current tax laws and not rely on potential future changes to reduce their tax liabilities.
Stay informed and consult with experienced cannabis tax professionals at M.A. Rubin CPA, PLLC to navigate the complex tax landscape facing the cannabis industry today.
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M.A. Rubin CPA, PLLC
Tel: 833-MA-Rubin (627-8246)
Email: Blog@RubinTaxRelief.com
Disclaimer: This blog post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional for specific advice regarding your business.
