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IRS Tells Cannabis Firms That 280E Tax Deductions Are Unavailable Till CSA Reclassification Complete

In a recent press release, the Internal Revenue Service advised that cannabis companies refrain from taking federal tax deductions for business expenses. While these deductions are provided for other businesses under section 280E, cannabis businesses aren’t allowed to mainly because the drug is still a controlled substance.

Section 280E doesn’t allow credits or deductions for any amount incurred or paid in conducting any business or trade that includes trafficking a Schedule 1 or 2 substance. This applies to businesses that sell cannabis, even if they operate in legal states. Currently, cannabis is classified as a Schedule 1 substance under the Controlled Substances Act. However, the drug may soon be moved to Schedule III once the Department of Justice completes its review.

In its press release, the IRS explained that cannabis was subject to the limitations of the Internal Revenue Code and any taxpayer who sought a refund of taxes paid related to the aforementioned statute by filing amended returns wasn’t entitled to a payment or refund.

This statement comes at a time when some multistate cannabis operators have begun seeking refunds for the “excess” taxes they paid in the previous years because of Section 280E. For instance, Trulieve recently revealed that it applied for and received $113 million in refunds. The company is the primary backer of a legalization campaign in Florida.

Ascend Wellness and TerrAscend Corp. (TSX: TSND) (OTCQX: TSNDF) have also disclosed that they are expecting refunds. However, this doesn’t align with the IRS’ statement, with the body noting that while the grounds for these claims often varied, they were working on addressing claims filed.

The IRS explained that the Department of Justice hadn’t finalized its recommendation to reclassify cannabis, adding that there was an open public-comment period ongoing. In addition, the agency noted that it was possible the proposed change in policy would be subjected to an administrative hearing review.

It should be noted that the IRS 280E statute doesn’t forbid an individual in the industry from reducing gross receipts by calculating the cost of goods sold to determine gross income.

Meanwhile, some states have taken steps to offer tax relief to cannabis businesses subject to section 280E despite the federal rule not having changed. In April 2023, Representative Earl Blumenauer reintroduced a resolution that would alter the IRS code to permit state-legal cannabis businesses to take federal tax deductions afforded to companies in other industries. This comes after the Congressional Research Service noted that the IRS had provided little guidance on how Section 280E would be applied.

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