What the end of 280E might mean for cannabis business taxes

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As the U.S. Drug Enforcement Administration weighs whether to revise marijuana to a Schedule 3 controlled substance, regulated cannabis producers are looking forward to the prospect of easing their heavy tax burdens under Section 280E of the federal tax code.

Moving marijuana to Schedule 3 from Schedule 1 would end 280E’s effect on the cannabis industry, allowing state-regulated companies to “deduct, for federal income tax purposes, all their ordinary and necessary business expenses, the same as any other company would do,” said Thomas Ostrander, a partner with Philadelphia-headquartered law firm Duane Morris.

The law firm is advising the cannabis industry of several key tax implications of rescheduling:

  • Past taxes paid under 280E are unlikely to be refunded.
  • Unpaid past taxes due under 280E would probably still be owed.
  • If rescheduling is completed sometime in 2024, it’s possible that 280E taxation on the marijuana industry could end retroactive to Jan. 1, 2024.

However, as the marijuana industry knows all too well, the exact timing of government policy reform such as rescheduling can be unpredictable.

“It’s hard to say when this is going to happen,” Ostrander cautioned.

“Don’t assume that this is going to happen next year.”

280E burden on cannabis companies

Under 280E, state-legal marijuana companies paid more than $1.8 billion in excess taxes compared to non-cannabis businesses in 2022, Portland, Oregon-based MJ sector research firm Whitney Economics said earlier this year.

Whitney forecasted those excess tax payments would grow to $2.1 billion in 2023.

The 280E phenomenon often results in tax rates of more than 70% for marijuana retailers in particular, Whitney noted.

In light of such a burden, the prospect of lowering those tax payments would open up new opportunities for U.S. cannabis companies.

Jon Levine, CEO and president of Massachusetts-based multistate cannabis operator MariMed, anticipates that the end of 280E for the marijuana industry would save the company millions of dollars annually.

“I think those millions of extra cash flow every year would be a great opportunity to help us continue our growth, research and development and (give) money back to our employees for the continued growth that we’re going through,” he told MJBizDaily.

But Levine warned against counting those rescheduling chickens before they hatch.

For example, the possibility of marijuana banking reform via various iterations of the SAFE Banking Act has been dangled before the industry for years now with no results, Levine observed.

However, Levine added, “we do feel that this (rescheduling) opportunity will happen.”

Still, he said MariMed is planning for 2024 as if 280E taxation will still be in effect.

Levine added that the elimination of 280E taxation under rescheduling would be a particular boon to startup cannabis businesses, which “owe big money on top of a negative cash flow.”

Aaron Miles, chief investment officer of Chicago-headquartered MSO Verano Holdings, said the company had deferred taxes owed under 280E in the past but is “now managing that balance.”

He expects 280E taxation will cost Verano between $80 million and $100 million this year in combined state and federal taxes.

Since some state governments are cutting 280E taxes at the state level, he added, “the actual savings amount could change over time.”

In the meantime, Miles said Verano is “hearing all the right things” about the odds of marijuana rescheduling.

“Luckily, this doesn’t have to go through Congress, because we’re seeing the mess that’s going on in the House (of Representatives) right now. … I think this administration has all the incentive in the world to get this across the finish line,” he said.

Prepping for 280E changes 

If marijuana were to be moved to Schedule 3 sometime in 2024, 280E taxation on the cannabis industry might end for the tax year beginning Jan. 1, 2024, Duane Morris attorney Ostrander said.

If rescheduling took effect midyear, for example, “it wouldn’t make a lot of sense to say to companies, ‘You’ve got to compute your tax liability for half the year under 280E,'” he said.

Some marijuana companies have unpaid taxes owed under 280E, and Ostrander believes those past taxes would probably still be due to the IRS after rescheduling.

It’s also unlikely that corporate cannabis taxes paid under 280E in previous years would be refunded retroactively, Ostrander believes.

“The IRS is in the business of raising revenue to fund the operations of the United States government,” he said.

“They hardly ever give back money unless there’s a real strong reason to, in the form of what would be a refund claim.”

Ostrander said he and Duane Morris are representing Patients Mutual Assistance Collective Corp., a subsidiary of California marijuana company Statehouse Holdings, in a case involving the company’s 2016 tax liability under 280E.

They’re arguing that the tax is unconstitutional as a direct tax that is not apportioned among the states on the basis of population.

“We also assert that it is not a tax at all, but it’s a penalty,” Ostrander said.

Seeking a refund

The litigation has not yet had its day in court, and Ostrander acknowledged that previous legal challenges to the constitutionality of 280E taxation have failed, although he said those cases took a different legal approach.

However, Ostrander recommends that cannabis companies file protective refund claims for their taxes paid under 280E, just in case.

“Make those claims so you preserve your rights to get your money back if, indeed, 280E is declared unconstitutional and the court makes that ruling retroactive,” he said.

Florida-based MSO Trulieve Cannabis Corp. recently announced its own attempt to get a 280E tax refund to the tune of $143 million.

Trulieve did not reveal its exact legal strategy but said that the company “believes it does not owe” the taxes.

In terms of preparing for the possible end of 280E under rescheduling, Ostrander suggested that marijuana companies keep “good books and records of your operations” and file tax returns on time.

Ostrander said he frequently sees tax compliance issues in the cannabis industry.

“I’m seeing, regularly, returns filed late, which results in significant penalties and interest. It results in the IRS knocking on your door to collect,” he said.

“I haven’t seen any companies closed down, although that’s within the government’s power to do.”

For companies with existing 280E tax liabilities, Ostrander advised weighing options for paying through an installment agreement, an offer in compromise or a partial-pay installment agreement.

“There are options out there to keep the wolf from the door, so to speak,” Ostrander said, adding that the IRS is much more powerful than normal creditors.

“If you’ve got a significant debt to the Internal Revenue Service, treat it seriously. Don’t let the mail go unopened, and act within the time frame that these notices provide for you to get relief or protection from bad things happening.”

In the meantime, Verano’s Miles recommended that cannabis operators preparing for the end of 280E taxation “tighten up the balance sheet, be very smart and conservative with your cash.”

“Because right now, the best operators are going to be the ones that survive,” he continued.

“And if you didn’t know how to run your business pre-SAFE (Banking) passage or pre-rescheduling to (Schedule) 3, then you’re most likely not going to know how to run your business after.”

Solomon Israel can be reached at solomon.israel@mjbizdaily.com.