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News

AICPA Calls for Guidance for Cannabis Businesses Before Rescheduling by DOJ

By:
Karen Sibayan
Published Date:
Oct 25, 2024

GettyImages-1058292110 Marijuana Cannabis Lights LED

On Oct. 21, the AICPA submitted a letter to the Treasury and IRS asking for guidance for cannabis businesses in anticipation of a possible rescheduling. 

“Since the beginning of the decriminalization and legalization of marijuana across a growing number of states, cannabis businesses and their CPAs have struggled to walk the tightrope of an industry that is locally legal but federally illegal,” noted Melanie Lauridsen, vice president of tax policy and advocacy at the AICPA. “It’s imperative that the federal government’s tax administration bodies provide guidance to these profitable businesses and their advisors in advance of the rescheduling of marijuana to help ensure a clear understanding of their federal tax obligations and mitigate non-compliance.” 

In May 2024, the Department of Justice (DOJ) issued proposed language that would reschedule marijuana from a Schedule I controlled substance to a Schedule III controlled substance under section 280E of the Internal Revenue Code. Section 280E does not allow deductions or credits for amounts paid or incurred during the taxable year if a business involves trafficking in controlled substances. 

According to the AICPA’s letter, the main issue for the cannabis industry is a midyear change in the application of section 280E, such as a cannabis business’s expenses not being deductible for part of the year but being allowed as a deduction for the rest of the year once it is no longer under section 280E. 

In its letter, the AICPA said that with an imminent marijuana rescheduling, cannabis businesses must undergo tax planning by making preemptive moves such as delaying either making or incurring vendor payments to maximize the deductibility of such expenses or postponing equipment purchasing. These businesses are also compelled to take tax positions without the benefit of IRS guidance. This kind of mid-year change in 280E’s application will prompt artificial behaviors, cause uncertainty and create unnecessary risk while having various tax accounting consequences. 

The AICPA provided recommendations that it said should be implemented immediately as a starting point for issuing guidance to the cannabis industry. These recommendations include the retroactive treatment for expenses previously subject to section 280E. The AICPA recommends that the agencies issue guidance that says cannabis businesses can take deductions for the entire tax year in the year marijuana is rescheduled to a Schedule III controlled substance, making cannabis businesses no longer subject to 280E for that entire year and future years. 

The AICPA also recommends that the Treasury and the IRS issue guidance clarifying the tax treatment of issues arising from no longer being subject to section 280E, such as accounting year changes, partnership basis and depreciation. 

Applying the uniform tax treatment among cannabis businesses is another recommendation by the AICPA. It asked that the Treasury and IRS issue guidance ensuring that upon the rescheduling of marijuana as a Schedule III controlled substance, section 280E applies equally to all cannabis businesses legally operating within their respective states, regardless of whether they sell medical or recreational marijuana. 

The AICPA also asked that the agencies offer a voluntary disclosure program for cannabis businesses that would no longer be subject to section 280E. 

According to the AICPA, these recommendations are needed for the seamless and uniform transition of cannabis businesses from one schedule to another and for fair and transparent tax policies as the legal environment around cannabis changes. 

Forbes reported that the recent Supreme Court decision to overturn the Chevron doctrine means that federal agencies are no longer required to defer to their interpretations of ambiguous laws when Congress has yet to provide specific guidance. According to an article in Green Market Report, this shift could impact how agencies like the IRS apply Section 280E to cannabis businesses. If the Court considerably limits or removes Chevron’s deference, it would limit the IRS’s flexibility in interpreting tax statutes that have ambiguous language. 

President Joe Biden started the administrative process to reschedule cannabis in 2022 by directing Health and Human Services (HHS) and the DOJ to review its rescheduling, Forbes reported. After that directive, HHS recommended rescheduling cannabis to Schedule III, which classifies drugs with accepted medical uses and potential for abuse. 

That recommendation now is with the Drug Enforcement Administration, which is under the DOJ and possesses the final authority to act upon it and may end up reclassifying cannabis as a Schedule III drug, Forbes reported. 

If adopted, Forbes said this classification change would significantly shift federal policy by easing the tax restrictions under Section 280E for cannabis businesses, allowing them to deduct ordinary business expenses like other legal businesses.