Accounting group pushes for clarity as questions around cannabis tax rules mount
The Supreme Court's Chevron decision introduces a fresh aspect to demands for a definitive transition framework.
The IRS is under growing pressure to clarify cannabis tax regulations, as a significant Supreme Court ruling threatens to disrupt the agency's interpretive authority with rescheduling looming over the industry.
This week, the American Institute of CPAs urged the U.S. Treasury Department and the IRS to issue proactive guidelines for the industry's move away from 280E restrictions, including a decision on retroactive relief for the entire tax year when rescheduling happens.
"Since marijuana began to be decriminalized and legalized in an increasing number of states, cannabis businesses and their CPAs have faced the challenge of navigating an industry that is legal locally but illegal federally," said Melanie Lauridsen, AICPA’s vice president of tax policy and advocacy.
This push coincides with legal experts suggesting that the Supreme Court's recent Chevron ruling could fundamentally change how cannabis tax rules are interpreted. Jennifer Benda, a cannabis tax attorney at Holland & Hart, explained that the decision means courts are no longer required to defer to IRS interpretations of the provision preventing marijuana businesses from claiming standard deductions.
"Without Chevron deference, I would expect a court to independently determine whether this statement is correct," Benda told Green Market Report, referring to a recent IRS notice that maintains 280E restrictions until rescheduling is complete.
Even though new IRS guidance might not be subject to such deference under the ruling, "assuming that guidance is favorable because it removes uncertainty, the affected taxpayers are unlikely to challenge it," Benda noted.
Conversely, the IRS is intensifying its enforcement strategies. Senior Counsel Luke Ortner informed accountants at an AICPA conference in Denver in August that the agency might start seizing cannabis inventory to settle tax debts post-rescheduling—a significant departure from its traditional approach.
Staying ahead of rescheduling
The AICPA's recommendations address this initial move and outline specific transitional issues expected to emerge as the cannabis industry transitions away from the burdensome effects of section 280E," Benda said, referencing the June IRS notice and the Department of Justice’s May proposal to reschedule marijuana.
Central to their argument is a call for full-year deduction allowances when rescheduling occurs to prevent what the AICPA warned could lead to "artificial behaviors" and unnecessary risks from mid-year tax status changes.
For instance, if a cannabis business incurred $200,000 in typically deductible expenses (such as rent, professional services, and payroll taxes) during the first three quarters of 2024 and another $100,000 in the fourth quarter when rescheduling takes effect, the group proposed the business should be allowed to deduct the full $300,000 for the year instead of just expenses incurred after the effective date.
"Implementing accounting changes in the middle of a business's tax year has the potential to cause significant compliance issues, leading to confusion, unnecessary complexity, and increased tax administration expenses," the AICPA wrote in its letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel.
The organization also requested guidance on complex technical matters related to moving away from 280E, such as changes in accounting methods, partnership basis calculations, and depreciation treatment. A primary proposal involves establishing a voluntary disclosure program for businesses that may have already claimed deductions under the assumption that 280E didn't apply.
The stakes are high: The provision currently forces cannabis companies to pay effective tax rates of 70% or higher by denying standard business deductions. Nevertheless, some businesses are not waiting for the situation to be resolved, despite clear warnings from the IRS. For example, Trulieve Cannabis Corp. secured $113 million in tax refunds earlier this year.
“It’s crucial that the federal government’s tax administration bodies provide guidance to these profitable businesses and their advisors ahead of the marijuana rescheduling to ensure a clear understanding of their federal tax obligations and minimize noncompliance,” Lauridsen said.
