Jamie Jorgenstone (Courtesy photo)
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Acting Attorney General Todd Blanche’s final order rescheduling medical marijuana, but leaving adult-use cannabis in Schedule 1, has left the nationwide industry with many lingering questions. My personal favorites revolve around Internal Revenue Code 280E:
- When is relief from 280E effective?
- Which operators qualify?
- What can taxpayers do while waiting for guidance?
Accountants and lawyers in the cannabis industry have long speculated on the retirement of 280E. Most have shared the same prediction: once rescheduling happens, 280E relief will be on a go-forward basis.
Few have been optimistic about the IRS officially giving their blessing to amend prior-year tax returns for refunds, but the order granted the industry a glimmer of hop by encouraging the Secretary of the Treasury to “consider providing retrospective relief from Section 280E” for any years in which the operator held a qualifying medical marijuana license.
It’s something many have argued for years: if marijuana is found to meet the criteria of a Schedule 3 substance, then it always has. 280E never should have applied. But, while this is logically sound, it is impractical, or even impossible, from an administrative perspective.
How much does the IRS owe the cannabis industry for 280E?
According to a study published by Whitney Economics, the cannabis industry has paid $15 billion in excess 280E taxes since 2018. Notably, that was the first tax year 471(c) – a recent addition to the tax code – was able to be used to claim more costs and cut down on the 280E liability.
The whole 280E bill is much larger. The IRS simply can’t afford to refund all those taxes.
Publicly, cannabis companies have admitted to at least $1.6 billion in 280E taxes they believe they do not owe.
Unfortunately, the subsequent Treasury/IRS press release failed to mention consideration of relief for prior tax years. It did indicate that relief is expected to extend to the beginning of the 2026 tax year year, and noted that more guidance is forthcoming.
For which years could retroactive 280E relief be claimed?
Should retrospective relief be granted, it would only be available for tax years in which the statutes of limitation are still open for the taxpayer. Generally, statutes extend three years from the date you filed your return, or two years from the date you paid your liability, whichever is later.
So if you haven’t filed or paid, you may actually be in luck.
For those whose businesses are in compliance and timely file tax returns each year, the statutes expired last year for the 2021 tax year. Tax year 2022 will expire this year.
But if a taxpayer did not take some action to preserve the statutes, such as filing a protective claim or perhaps taking the leap and filing an amended return, that taxpayer has lost its ability to claim a refund of any overpaid tax.
Does marijuana rescheduling mean 280E relief applies to every cannabis business?
Per the order, FDA-approved marijuana products and products subject to a state-issued medical marijuana license have been placed in Schedule 3 of the Controlled Substances Act. 280E only applies to the trafficking of Schedule 1 and 2 substances.
Medical-only states like Pennsylvania and Florida have the most clarity here. Operators there are free from 280E. But what dual licensees in adult-use states?
We are awaiting guidance, but the consensus will most likely be that expenses must be allocated proportionately between medical and adult-use sales. Easy enough for retailers, but how does a producer or manufacturer make that distinction? And where does that leave exclusively adult-use licensees?
Unfortunately, we don’t have many answers yet.
I’ve spoken with attorneys who speculate that the language of the order may unintentionally allow hybrid licensees to take full advantage of the Schedule 3 tax benefits. The industry will likely need some brave players to test the waters before we get meaningful answers.
What should a cannabis business do now to prepare for 280E relief?
Most operators are waiting for guidance. But they’re not powerless in the meantime.
Taxpayers are not necessarily at the mercy of the IRS. A taxpayer is entitled to challenge the IRS’s interpretation of the law, including positions related to 280E. In fact, there are mechanisms built into the tax code and specified tax forms just for this.
You can challenge the IRS, but you must follow the prescribed procedures for doing so.
Taxpayers cannot arbitrarily apply their own misguided understanding of how taxes “should be.” Rather, what’s called the “reasonable basis standard” requires that the position be supported by recognized authorities. Examples include the Internal Revenue Code, regulations, court cases and official IRS guidance.
The real issue is whether the position is supported by one or more relevant tax authorities in a way that is objectively reasonable.
How does ‘reasonable basis’ apply to cannabis taxes?
A position meeting the reasonable basis standard is stronger than a frivolous or so-called “colorable claim,” but it does not mean the position is likely to prevail. But even if the position is unsuccessful, they are protected from the assessment of penalties.
For the last several years, a legal theory founded on the language of 280E, specifically the phrase “within the meaning,” has been circulating as a means of challenging the applicability of 280E to state-legal operators, even before rescheduling.
That argument made its way to Tax Court last year and is currently being litigated.
A “no 280E” position, if based on a well-reasoned interpretation of statutory language currently under litigation may satisfy the reasonable basis standard. Reasonable basis is not unilaterally determined by the IRS, and a position can indeed meet the standard even if the IRS claims it does not.
Further, penalty assessment is nuanced and case-specific. The IRS is required to consider a range of factors when assessing accuracy-related penalties. The risk of assessment is significantly reduced when the taxpayer acts in good faith, maintains accurate accounting records and provides transparent disclosure with the assistance of a qualified professional. Even if a position is determined not to meet the reasonable basis standard, demonstrating reasonable cause and good faith can still provide some penalty relief.
Should adult-use cannabis operators claim 280E relief?
While there is always the risk of the IRS assessing penalties if it disagrees with the taxpayer’s position, the buck does not stop with the IRS.
The taxpayer retains the right to contest those penalties through administrative appeals or judicial review. Of course, this is where each taxpayer’s risk tolerance must be measured.
Only the taxpayer can decide whether the risk is worth the reward and whether they want to fight the fight.
The implications of this order are not cut and dry. While I’m not holding my breath for the IRS to formalize guidance allowing for retrospective relief, a taxpayer may be justified in taking these “no 280E” positions anyway.
And although adult-use cannabis has not been rescheduled yet, this order may serve to further reinforce the position that cannabis does not “fit the meaning” of a Schedule 1 or 2 drug and, therefore, 280E should not apply despite its current classification.
Jamie Jorgenstone is a CPA and tax strategist at Calyx CPA LLC, where she advises cannabis and emerging plant-medicine businesses on complex tax issues.
