The Internal Revenue Service (IRS) will persist in pursuing tax payments from marijuana businesses that have taken deductions in anticipation of a potential federal rescheduling, according to a federal agency attorney. If such a reform is implemented, the attorney notes that the IRS could potentially be authorized to seize assets from cannabis companies that fail to meet their tax obligations.
IRS Clarifies Continued Enforcement of 280E Despite Potential Marijuana Rescheduling
IRS Senior Counsel Luke Ortner addressed the possible effects of the Biden administration's proposal to reschedule marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA) during a fireside chat at the American Institute of Certified Public Accountants (AICPA) cannabis conference in Denver last month.
Although this change in policy would let state-licensed cannabis firms claim federal tax deductions that were previously forbidden by IRS code 280E, several significant corporations have already made such claims, even though the rulemaking process is still in progress.
For instance, in January, multi-state operator Trulieve disclosed it had received $113 million in 280E refunds it had applied for. Similarly, TerrAscend and Ascend Wellness have announced expectations for 280E refunds.
However, the IRS later clarified that the 280E policy remains in effect until a final rule is issued. Ortner reaffirmed this position during last month’s conference, stating that even if rescheduling is implemented, the IRS will “continue to enforce 280E for years prior” to the reform, according to a summary of his remarks by the CPA firm Holland & Hart.
“The IRS’s policy is not to overlook past violations just because the rules have changed moving forward,” the firm paraphrased Ortner during the closed-door session.
An IRS spokesperson confirmed on Monday that the agency consulted with Ortner, who verified the accuracy of Holland & Hart’s summary of his comments.
Legal Challenges to 280E Persist as IRS Reaffirms Strict Interpretation.
Companies and industry stakeholders have put forth various legal arguments to support their 280E tax deduction claims, including asserting that the policy should not apply to businesses whose marijuana operations are entirely intrastate.
IRS Senior Counsel Luke Ortner acknowledged that ongoing court cases may ultimately shape how the IRS handles these matters in the future. However, for the time being, the agency’s stance remains unchanged, and it will seek to reclaim any payouts granted in violation of 280E.
“As of now—unless courts decide otherwise—the IRS interprets section 471(c) narrowly and will maintain its position that it does not provide a loophole to bypass 280E,” Ortner said, according to a summary from the CPA firm Holland & Hart.
The summary also noted that Ortner reassured accountants they would not face penalties for assisting state-licensed cannabis businesses with their tax filings.
Currently, with marijuana classified as a Schedule I federally prohibited substance, the IRS has largely deferred to the Drug Enforcement Administration (DEA) for enforcement and has not aggressively pursued cannabis businesses, regardless of their tax compliance. Ortner noted that this approach could change if marijuana is rescheduled.
According to the summary, the IRS “could seize and sell a cannabis business’s assets—including marijuana inventory—to satisfy unpaid tax liabilities” if rescheduling occurs.
While the IRS has previously seized and auctioned off “vice products” from alcohol and tobacco companies that violated federal tax laws, these products are not classified under the Controlled Substances Act (CSA). Since marijuana would remain federally controlled even if moved to Schedule III, Holland & Hart partner Rachel Gillette suggested it’s unlikely the IRS would seize cannabis products under the new classification.
“Schedule III still classifies marijuana as a controlled substance, just in a different category of the CSA. The IRS might have to wait for full descheduling to seize marijuana assets if ‘illegality’ is the issue,” Gillette said. “However, the IRS could become more comfortable seizing and selling lights, grow equipment, and similar assets under Schedule III. Cannabis products themselves might still be a challenge.”
The rescheduling decision is not final yet. President Joe Biden recently acknowledged this while highlighting the administration’s role in initiating the review that led to the Schedule III recommendation. The DEA is set to hold an administrative hearing in December to gather further input before potentially moving forward with the rulemaking process.
State-Level Relief and Congressional Action Offer Hope for Cannabis Industry Amid IRS Enforcement
Meanwhile, a number of states have put policies into place to offer marijuana companies impacted by the IRS 280E legislation state-level tax relief.
Furthermore, a measure that would change the IRS law and enable state-legal marijuana firms to ultimately claim federal tax deductions that are accessible to other sectors was proposed by Representative Earl Blumenauer (D-OR) in April.
The Internal Revenue Service (IRS) "has offered little tax guidance regarding the application of Section 280E," according to a 2021 study from the Congressional Research Service (CRS).
In a 2020 update, the IRS clarified that 280E does not "prevent a marijuana industry participant from reducing its gross receipts by the properly calculated cost of goods sold to determine gross income," even if cannabis firms are not permitted to deduct conventional business expenses.
This modification seems to address a 2020 report from the internal watchdog of the Treasury Department, which blasted the IRS for not giving marijuana business taxpayers enough advice on complying with federal tax laws. The IRS was asked to "develop and publicize specific guidance for the marijuana industry" by the inspector general for tax administration.
IRS 280E TAX CREDITS IN CANNABIS, READ ON...
