IRS Advises Marijuana Businesses That They Still Can’t Take Federal Tax Deductions Due To 280E Until Rescheduling Is Finalized

The Internal Revenue Service (IRS) is advising marijuana companies that they still cannot take federal tax deductions for business expenses that afforded to other traditional industries unless the administration finalizes a rule to reschedule cannabis.

In a press release on Friday, IRS clarified that its policy, known as 280E, still applies as the federal government moves through the process of potentially moving marijuana from Scheduled I to Schedule III of the Controlled Substances Act (CSA).

“Until a final federal rule is published, the Internal Revenue Service today reminded taxpayers that marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code,” it said.

“The law with respect to the schedule or classification of marijuana has not changed,” the advisory continued. “Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment.”

This comes as certain multi-state marijuana operators are seeking refunds for what they say are excess taxes paid in past years due to 280E.

For example, Trulieve, the main financial backer of a Florida legalization campaign, has disclosed receiving a $113 million in 280E refunds it applied for.

TerrAscend and Ascend Wellness have similarly said that they’re expecting 280E refunds.

IRS on Friday, however, seemed to imply that such potential requests are under review.

“Although the law has not changed, some taxpayers are filing amended returns. The grounds for filing such claims vary, but these claims are not valid,” it said. “The IRS is taking steps to address these claims.”

As IRS noted, the recommendation from the Justice Department to reclassify marijuana has not yet been finalized. There is an ongoing public comment period, and a it is possible that the proposed policy change will be subject to an administrative hearing review.

“Section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act,” IRS said.

“This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana,” the agency added. “Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

While DOJ has formally recommended rescheduling marijuana, “[u]ntil a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.”

Multiple states have taken steps to provide state-level tax relief to marijuana businesses that are subject to the IRS 280E statute, but the federal rule has not yet changed. And it’s unclear when the proposed federal marijuana rescheduling rule might take effect.

Last April, Rep. Earl Blumenauer (D-OR) reintroduced a congressional bill that would amend the IRS code to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.

The latest guidance comes three years after the Congressional Research Service (CRS) noted in a 2021 report that the agency “has offered little tax guidance about the application of Section 280E.”

RS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

The IRS update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”

The Justice Department, for its part, has said it is particularly interested in receiving public comments on the “unique economic impacts” of its marijuana rescheduling proposal given that state-level legalization has created a “multibillion dollar industry” that stands to benefit from possible federal tax relief under the reform.

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Photo courtesy of Chris Wallis // Side Pocket Images.