The Internal Revenue Service (IRS) is warning marijuana businesses that they will continue to be unable to deduct business expenses from federal taxes like other traditional industries unless the government issues a new rule reclassifying cannabis.
In a press release Friday, the IRS clarified that its policy, known as 280E, remains in effect while the federal government is in the process of potentially moving marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA).
“Pending the issuance of a final federal regulation, the Internal Revenue Service today reminded taxpayers that marijuana remains a Schedule I controlled substance and is subject to the restrictions of the Internal Revenue Code,” it said.
“The law regarding the classification or classification of marijuana has not changed,” the notice continues. “Taxpayers who seek a refund of taxes paid under Section 280E of the Internal Revenue Code by filing amended tax returns will not be entitled to a refund or payment.”
This comes as certain marijuana operators in several states are seeking refunds for what they believe were overpaid taxes in past years due to 280E.
For example, Trulieve, the primary funder of a campaign to legalize marijuana in Florida, announced that it had received $113 million in requested 280E refunds.
TerrAscend and Ascend Wellness have also stated that they expect refunds of 280 euros.
On Friday, however, the IRS indicated that such potential requests were being reviewed.
“Although the law has not changed, some taxpayers are filing amended tax returns. The reasons for filing such claims vary, but these claims are not valid,” it said. “The IRS is taking steps to process these claims.”
As the IRS noted, the Justice Department’s recommendation to reclassify marijuana is not yet complete. A public comment period is ongoing, and it’s possible the proposed policy change will be subject to an administrative hearing.
“Section 280E prohibits any deduction or credit for amounts paid or incurred in the conduct of a trade or business consisting of the illegal trafficking of Schedule I or Schedule II controlled substances within the meaning of the federal Controlled Substances Act,” the IRS said.
“This applies to businesses that sell marijuana even if they operate in states where the sale of marijuana is legal,” the agency added. “However, section 280E does not prohibit a participant in the marijuana industry from reducing its gross receipts by the properly calculated cost of goods sold to determine its gross income.”
Although the Department of Justice has officially recommended reclassifying marijuana, “until a final rule is issued, marijuana remains a Schedule I controlled substance and is subject to the restrictions of Section 280E of the Internal Revenue Code.”
Several states have taken steps to provide state-level tax relief to marijuana businesses subject to IRS 280E law, but the federal regulation has not changed so far. And it’s unclear when the proposed overhaul of federal marijuana regulation might take effect.
Last April, Democratic Rep. Earl Blumenauer (Oregon) reintroduced an IRS (Internal Revenue Service) bill that would amend the tax code to finally allow federally legalized marijuana businesses to claim the same federal tax deductions as businesses in other industries.
The latest guidance comes three years after the Congressional Research Service (CRS) found in a 2021 report that the agency “has offered little tax advice on the application of Section 280E.”
RS provided some guidance in a 2020 update, explaining that while cannabis businesses cannot take standard deductions, 280E “does not prohibit a marijuana industry participant from reducing its gross receipts by the properly calculated cost of goods sold for the purpose of determining its gross income.”
The IRS update appeared to be a response to a Treasury Department internal audit report released in 2020. The department’s inspector general for tax administration had criticized the IRS for not adequately advising taxpayers in the marijuana industry on compliance with federal tax laws. And he directed the agency to “develop and publish specific guidance for the marijuana industry.”
The Justice Department, for its part, has said it is particularly interested in public comments on the “unique economic impact” of its marijuana reclassification proposal, since state-level legalization has created a “multibillion-dollar industry” that could benefit from potential federal tax breaks under the reform.
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Photo courtesy of Chris Wallis // Side Pocket Images.
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