IRS Warns Cannabis Businesses: No Federal Tax Deductions Until 280E Rule Changes

In a recent announcement, the Internal Revenue Service (IRS) reaffirmed that marijuana businesses are ineligible for federal tax deductions on business expenses unless a rule to reschedule cannabis is finalized. This directive, known as Section 280E of the Internal Revenue Code, remains in effect despite ongoing discussions about potential changes to marijuana’s federal classification.

Current Classification and Tax Implications

The IRS clarified that marijuana continues to be classified as a Schedule I controlled substance under the Controlled Substances Act (CSA). Until a final federal rule is enacted, businesses involved in marijuana sales cannot claim standard deductions or credits available to other industries.

“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,” the IRS stated.

Seeking Refunds Amidst Uncertainty

Despite these restrictions, some multi-state marijuana operators have sought refunds for what they argue are excessive taxes paid in previous years due to Section 280E. Companies such as Trulieve, TerrAscend, and Ascend Wellness have reported expectations of refunds under review by the IRS.

“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,” the IRS commented. “The IRS is taking steps to address these claims.”

Federal Policy Development and Legislative Efforts

The Department of Justice (DOJ) has proposed rescheduling marijuana, currently in a public comment period, with potential administrative hearings ahead. Meanwhile, federal legislation introduced by Rep. Earl Blumenauer aims to amend IRS codes, allowing state-legal marijuana businesses to access federal tax deductions akin to other sectors.

State vs. Federal Discrepancies

While several states have implemented state-level tax relief measures for marijuana businesses, federal guidelines under Section 280E remain unchanged. The timeline for potential federal rescheduling and its implications for tax relief remain uncertain.

IRS Response and Future Guidance

The IRS update follows critiques from the Treasury Department’s inspector general for tax administration regarding insufficient guidance for marijuana industry taxpayers. The agency has committed to developing clearer directives specific to cannabis-related tax compliance.

Looking Ahead

As federal agencies and lawmakers continue to navigate the complexities of cannabis taxation, stakeholders in the industry await further developments that could significantly impact their financial obligations and operational strategies.

The latest IRS guidance underscores the ongoing challenges posed by conflicting federal and state marijuana laws, highlighting the need for clarity and consistency in regulatory frameworks affecting this evolving sector.

This article provides an overview of the current federal tax landscape for marijuana businesses, emphasizing the implications of IRS policy and legislative efforts amidst broader discussions on cannabis rescheduling and economic impacts.