Congressional Researchers Analyze 280E Marijuana Tax Penalty And Legislative Solutions
In a new report published this month, Congressional researchers examine tax policies and restrictions for the marijuana industry—and how those could change if any number of federal reform bills are enacted.
The Congressional Research Service (CRS) analysis focuses on a section of Internal Revenue Services (IRS) code known as 280E, which precludes cannabis companies from taking certain federal tax deductions or credits that are available to other businesses, regardless of their state legality. But they are still obligated to pay taxes on their federally illegal income.
“The Schedule I status of marijuana means that marijuana businesses are treated differently from many other businesses for tax purposes,” CRS said. However, “Congress has broad authority to alter the tax treatment of marijuana businesses.”
“The legislative history of Section 280E indicates that Congress enacted the provision to codify a sharply defined public policy against drug dealing,” the report states.
The provision was enacted in 1982 as a way to prevent drug traffickers from writing expenses off their taxes, but it is widely applied today on state-licensed marijuana growers, processors and dispensaries, greatly increasing their effective tax rates as compared to businesses in other industries.
280E applies to substances in Schedules I and II of the Controlled Substances Act (CSA).
“Recent legislative proposals aim to relax federal restrictions on marijuana or to mitigate the disparity between federal and state marijuana regulation,” the new CRS report states. “Many of these proposals would alter the tax treatment of marijuana businesses by re-scheduling or descheduling marijuana under the CSA or by making marijuana-specific exceptions.”
“Under these proposals, Section 280E would no longer prohibit marijuana businesses from taking deductions and credits,” it says.
While several bills were introduced last session to federally legalize cannabis—including the House-passed Marijuana Opportunity, Reinvestment and Expungement (MORE) Act—they have not been refiled so far this year.
Senate Majority Leader Chuck Schumer (D-NY), Senate Finance Chairman Ron Wyden (D-OR) and Sen. Cory Booker (D-NJ) are in the process of developing legislation to end cannabis criminalization and promote social equity, and they’ve met with advocates about how best to draft that proposal.
Meanwhile, House Judiciary Chairman Jerrold Nadler (D-NY) recently said he will soon be reintroducing the MORE Act.
A number of standalone bills to remove the 280E penalty’s application on marijuana businesses have also been filed over the years in Congress, but none has ever been given a hearing or a vote.
But for the time being, the marijuana industry continues to face tax policy challenges under the umbrella of prohibition. And CRS noted that IRS “has offered little tax guidance about the application of Section 280E.”
It did provide some guidance in an update last year, 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 last year. 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.”
One note that IRS especially wants to make clear to cannabis firms is that they still have to pay income tax. And CRS articulated that in its report as well.
“Like non-marijuana businesses, marijuana businesses are subject to tax on all of their income,” it said. “Under federal law, all income is taxable, including income from unlawful activities. In contrast, not all expenses are deductible from a taxpayer’s gross income.”
But paying those taxes has proved onerous—both for cannabis businesses and the IRS itself. The head of the agency told Congress last month that it would “prefer” for state-legal marijuana firms to be able to pay taxes electronically, as the current largely cash-based system is complex and inefficient.
Former Treasury Secretary Steven Mnuchin said in 2019 that he’d like to see Congress approve legislation resolving the cannabis banking issue and he pointed to the fact that IRS has had to build “cash rooms” to deposit taxes from those businesses as an example of the problem.
CRS also discussed legislation that’s “attempted to increase marijuana businesses’ access to banking and financial service” like the Secure and Fair Enforcement (SAFE) Act, which passed the House in 2019 and also as part of two COVID-19 relief packages. “Many financial institutions are unwilling to provide state-sanctioned marijuana businesses with common banking products and financial services due to federal laws that impose civil and criminal liability on financial institutions handling money tied to marijuana.”
While there may be that reluctance, federal data released earlier this month shows that the number of banks and credit unions that report servicing marijuana businesses seems to be stabilizing.
For three quarters in a row, those numbers were consistently declining—due partly to revised reporting requirements from the Financial Crimes Enforcement Network (FinCEN) and also because of the coronavirus pandemic. But the latest report signals that the trend is lifting.
Lawmakers in the Senate and House filed new bills to address the marijuana banking issue in recent days.
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