Politics
National Accountants Group Urges IRS And Treasury To Update Marijuana Tax Guidance Ahead Of Federal Rescheduling
A national association of accountants is asking the Treasury Department and Internal Revenue Service (IRS) to issue updated guidance on federal tax policy for marijuana businesses as the administration’s rescheduling proposal moves through the process.
The American Institute of Certified Public Accountants (AICPA) is also requesting that the federal financial agencies give cannabis companies a chance to correct tax deduction claims they’ve made in anticipation of a potential federal rescheduling decision, after IRS notified stakeholders that it intends to recoup any payouts that might’ve been made prior the government potentially finalizing a rule moving marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA).
In a letter sent to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel on Monday, AICPA said it was important to take steps to clarify the rules—particularly as it concerns the IRS code known as 280E that precludes marijuana businesses from taking federal tax deductions as long as it remains a Schedule I drug—ahead of a possible rescheduling move.
If cannabis is reclassified as a Schedule III drug, as the Justice Department formally proposed in May following a scientific review by the U.S. Department of Health and Human Services (HHS), that would make marijuana companies eligible for federal tax deductions. But certain businesses have preemptively claimed deductions as the rescheduling process has unfolded.
Last month, an IRS official clarified that it will continue to seek tax payments from those firms if they claimed the deductions before rescheduling is codified.
Given the continued confusion within the sector, AICPA offered the federal agencies recommendations that they hope will serve as a “starting point for issuing guidance to cannabis businesses and tax practitioners as soon as possible in anticipation of potential rescheduling of marijuana as a controlled substance.”
“We look forward to working with you on these issues and others to ensure that taxpayers are encouraged to comply with the law and that tax professionals are able to provide advice and services to cannabis businesses,” the institute said.
The organization’s first recommendation is for Treasury and IRS to issue guidance providing that marijuana businesses are able to take deductions for the full tax year if rescheduling is implemented at any point in the year. If there’s a mid-year policy change without such guidance, that could “create artificial behaviors, produce uncertainty and unnecessary risk, and have a myriad of tax accounting consequences,” it said.
“Implementing accounting changes to a business in the middle of its tax year has the potential to cause significant compliance issues, which leads to confusion, unnecessary complexity, and increased tax administration expenses. By allowing cannabis businesses to claim deductions for the full tax year, they will be afforded a clear timeline for adjusting accounting practices and implementing new tax planning measures. This approach ensures consistency and fairness in tax treatment throughout the business’s entire tax year.”
Guidance should also be issued to clarify the “tax treatment of issues arising from no longer being subject to section 280E, including accounting year changes, partnership basis, and depreciation,” it said. For example, cannabis companies should be advised on how start-up expenditures that were made before they opened their doors will be treated upon a potential rescheduling determination.
“By providing guidance in advance of marijuana rescheduling that addresses cannabis business issues in a post-section 280E tax regime, Treasury and the IRS would have ample time to provide fair and adequately tailored transitional relief, would allow tax practitioners providing accounting services to cannabis businesses to take reliable and reasoned tax positions, and would ease the expense and time required to adopt appropriate tax and accounting practices in light of the transition away from section 280E.”
AICPA also recommended that the agencies should provide guidance stipulating that, if marijuana is federally rescheduled, all state-licensed businesses will be treated equally under the tax code, even if the specific state laws they operate under are different. For instance, the institute said IRS should make clear that businesses selling marijuana for medical or recreational purposes should be subject to the same policies.
Finally, AICPA said Treasury and IRS should offer a “voluntary disclosure program” for businesses that preemptively claimed tax deductions prior to rescheduling being finalized, giving them a chance to fix their claims so as not to be penalized under 280E.
“Although cannabis businesses may have unintentionally claimed deductions limited by section 280E, others may have claimed such deductions in anticipation of the rescheduling of marijuana as a Schedule III controlled substance,” it said. “A voluntary disclosure program targeting cannabis businesses would allow cannabis businesses not in compliance the opportunity to correct such issues and to have a fresh start under a tax system with greater clarity and guidance than when they were subject to section 280E.”
Several major companies have already claimed deductions even as the rulemaking process remains underway.
For example, in January the multi-state operator Trulieve disclosed receiving a $113 million in 280E refunds it applied for. TerrAscend and Ascend Wellness have similarly said that they’re expecting 280E refunds.
The letter to the federal officials comes about two months after AICPA held a cannabis conference in Denver, where IRS Senior Counsel Luke Ortner discussed potential implications of the Biden administration’s proposal to move marijuana to Schedule III.
In June, IRS also clarified that the 280E policy still applies until a final rule is issued, and Ortner affirmed that stance during last month’s conference. He added that even if rescheduling is implemented, IRS will “continue to enforce 280E for years prior” to the reform, according to a summary of his talk prepared by the law firm Holland & Hart.
Companies and industry stakeholders have made a number of legal arguments in defense of their 280E tax deduction claims, including making the case that the policy shouldn’t apply in instances where businesses’ marijuana activities are wholly intrastate.
Ortner acknowledged that certain challenges are playing out in the courts that could determine how IRS ultimately proceeds in the future. But for now, he said, the agency’s position hasn’t changed, and it will aim to recoup any payouts that were requested and granted in contravention of 280E.
Rescheduling isn’t a given quite yet, as President Joe Biden himself recently acknowledged while touting the administration’s role in directing the review that led to the Schedule III recommendation. The Drug Enforcement Administration (DEA) is set to hold an administrative hearing to gain additional input on the proposed reform in December before potentially proceeding to final rulemaking.
Vice President Kamala Harris, the Democratic presidential nominee, recently said that part of the reason for the delay in the administration’s marijuana rescheduling effort is federal bureaucracy that “slows things down,” including at DEA.
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In the interim, multiple states have taken steps to provide state-level tax relief to marijuana businesses that are subject to the IRS 280E statute.
Also, 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 Congressional Research Service (CRS) noted in a 2021 report that the agency “has offered little tax guidance about the application of Section 280E.”
IRS 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.”
Photo courtesy of Mike Latimer.
