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IRS to Pot Businesses: Marijuana is Still a Schedule I Controlled Substance

Therefore, cannabis businesses are still unable to claim normal business tax deductions, as IRC Section 280E stipulates.

The IRS on June 28 issued a reminder that marijuana remains a Schedule I controlled substance, meaning that cannabis businesses are still unable to claim normal business tax deductions.

The Biden administration has signaled it will reschedule marijuana into a moderate-risk category of substances, which would open up tax breaks for pot businesses in states where the drug is legal. However, the IRS said on Friday that until a final federal rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of the Internal Revenue Code.

“The law with respect to the schedule or classification of marijuana has not changed,” the agency said. “Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment. Although the law has not changed, some taxpayers are filing amended returns. The grounds for filing such claims vary, but these claims are not valid. The IRS is taking steps to address these claims.”

IRC Section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act, according to the IRS.

This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana, the IRS said. However, Section 280E doesn’t 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 big question hanging over the IRS’s message: Exactly which companies are the target for this statement? Bernie Becker of Politico wrote:

It’s not as if companies should expect to get retroactive tax relief after marijuana is rescheduled, as industry insiders told Politico Morning Tax. Instead, their ability to claim normal business deductions would almost certainly be for the future.

However, large cannabis companies have been seeking refunds already, arguing that Section 280E doesn’t apply to them even before the scheduling change goes into effect, according to tax experts who work with pot businesses.

For instance, Trulieve, a Florida-based cannabis retailer that also operates in other states, announced earlier this year that it had received more than $100 million in tax refunds after challenging whether it was limited by Section 280E.

The company had announced last year — well before the administration revealed its plans for a scheduling change — that it was seeking more than $150 million in retroactive relief from both the federal and state governments.

Trulieve’s executives haven’t publicly discussed what their argument is to the IRS, suggesting that doing so could hurt them in any potential court case with the tax collector.

But multiple close watchers of the situation believe Trulieve is claiming that Section 280E doesn’t apply to it because the business is based on intrastate commerce — not the interstate commerce that Congress can regulate.

Michael Harlow, who leads the cannabis industry practice at top 20 accounting firm CohnReznick, told Politico the pot companies that have sought refunds from the IRS are aware their claims ultimately might not be successful, but they likely believe their cases are in a stronger position now that marijuana is on the path to be rescheduled.

“They’re taking a position that’s aggressive and forcing the IRS to either process or litigate,” Harlow said.