IRS Confirms Marijuana’s Status and Section 280E Tax Limitations

The Internal Revenue Service (IRS) has issued a reminder to taxpayers that marijuana remains classified as a Schedule I controlled substance under federal law. Consequently, businesses involved in the marijuana trade are subject to the limitations of Internal Revenue Code Section 280E. This reminder comes in light of ongoing confusion and attempts by some taxpayers to seek refunds related to Section 280E by filing amended returns.

The law concerning the schedule or classification of marijuana has not changed, and taxpayers who file amended returns in hopes of securing refunds related to Section 280E are not entitled to any refunds or payments. Despite the unchanged legal status, some taxpayers have been filing amended returns, citing various grounds for their claims. However, these claims are not valid, and the IRS is actively addressing them.

Section 280E of the Internal Revenue Code disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that involves the illegal trafficking of a Schedule I or II controlled substance, as defined by the Federal Controlled Substances Act. This provision applies to businesses that sell marijuana, even in states where the sale of marijuana is legal. The intent of Section 280E is to prevent businesses engaged in the illegal drug trade from benefiting from standard business deductions.

However, Section 280E does not prohibit a participant in the marijuana industry from reducing its gross receipts by the properly calculated cost of goods sold (COGS) to determine its gross income. This means that while marijuana businesses cannot claim deductions or credits for business expenses, they can still subtract the cost of their products from their gross receipts when calculating their taxable income.

On May 21, 2024, the Justice Department published a notice of proposed rulemaking in the Federal Register, initiating a formal rulemaking process to consider rescheduling marijuana under the Controlled Substances Act. Despite this development, until a final rule is published and enacted, marijuana remains a Schedule I controlled substance. As such, it continues to be subject to the limitations imposed by Section 280E.

This reminder from the IRS is crucial for marijuana businesses and their tax professionals to understand the current legal landscape and avoid filing invalid amended returns in hopes of receiving refunds. Businesses in the marijuana industry should ensure they are compliant with Section 280E and properly calculating their gross income without relying on deductions or credits for business expenses.

For further information on Section 280E and its implications for marijuana businesses, taxpayers and tax professionals can visit the IRS website or consult with a tax advisor who is knowledgeable about the unique challenges facing the marijuana industry.

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