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Federal Tax Changes Could Benefit Legal Cannabis Businesses

S.J. Steinhardt
Published Date:
Nov 1, 2023


Some members of Congress have been trying to make it easier for legal cannabis businesses to cope with their taxes, Accounting Today reported.

The continued classification of marijuana as a Schedule I controlled substance has hindered the growth of a multibillion-dollar industry in the 38 states that allow it for medical use and in the 23 states, plus the three U.S. territories and the District of Columbia, that have legalized its recreational use.

But relief may be on the way for legal cannabis businesses that are struggling to become profitable.

In August, the U.S. Department of Health and Human Services (HHS) made an official recommendation to the Drug Enforcement Administration (DEA) to move cannabis from its status as a Schedule I controlled substance to Schedule III. Such a move could lead to the availability of federal tax deductions and credits.

On the legislative front, the Secure and Fair Enforcement Regulation (SAFER) Banking Act, was passed by a Senate committee in September. If passed, the legislation would allow cannabis businesses to access regular banking services.

An earlier version of this legislation, the SAFE Banking Act, passed the U.S. House of Representatives six times since it was introduced in 2013, most recently in 2021.

Before that, in April, Rep. Earl Blumenauer, (D-Ore.), introduced the Small Business Tax Equity Act, which would create an exception to Section 280E of the Internal Revenue Code to allow marijuana businesses operating in compliance with state law to take deductions associated with the sale of marijuana, just like any other legal business, according to Accounting Today.

"Cannabis right now is a Schedule I controlled substance, so it's on the same list as heroin and some other really unsavory illegal drugs, ones that you would normally think of as things people go to jail for," said Kristin Kowalski, a partner in the tax practice at The Bonadio Group in Syracuse, N.Y., in an interview with Accounting Today. "Schedule I means that the DEA considers it to have no possible useful medical benefit, it's not useful for research, and there's nothing about it that warrants it being out in the United States, so all of the states that have legalized it are obviously in direct conflict with that standing of it being on Schedule I."

Until the DEA acts, the use of tax deductions is severely limited by cannabis businesses, she added. "Right now all cannabis businesses are subject to 280E, which means that they can't take any deductions," she said. "They are taxed based on their gross revenue. That's their receipts, minus cost of goods sold. All they can subtract is cost of goods sold, but everything else—your marketing overhead, utilities, rent, especially if you're a dispensary—none of that is deductible. Plus you can't take any federal tax credits either. There are very high effective tax rates in the cannabis world."

New York, one state that has legalized cannabis, restricts the number of dispensaries allowed to open, with only about 26 now listed by the state. The tax advice is fairly simple until changes are made at the federal level, said Kowalski.

She noted that “a lot of the states where they have legal adult-use cannabis, New York included, they've decoupled from 280E. While you can't get those deductions for federal, you can take them on your state return, it helps a little bit with the tax burden."

“But interestingly, New York City has not decoupled from 280E yet,” she said. “It has been passed, but it has not yet been signed. That's an interesting thing for the New York City dispensaries to have to deal with."

On the federal level, if cannabis is moved off of Schedule I, that would bring many more tax benefits to dispensaries across the country. Kowalski used the example of hemp, which used to be on Schedule I along with cannabis, and was descheduled in 2018. No longer a controlled substance and now legal, “all of a sudden, we had all these hemp growers who now were eligible for all these same tax benefits."

To learn about the ethical considerations that CPAs and CPA firms should be aware of when offering services to the cannabis industry, attend the Foundation for Accounting Education's Ethical Considerations in Working with Cannabis Webinar on Nov. 16.

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