It is still too early for cannabis companies to try and take advantage of potential tax relief should the Justice Department (DOJ) reschedule cannabis under the Controlled Substances Act.
In a recent news release, the Internal Revenue Service (IRS) reminded taxpayers that cannabis remains a Schedule I controlled substance. As such, cannabis businesses can’t yet seek relief from IRS Code Section 280E, which prohibits taking deductions or credits for any amount that was paid or incurred as part of any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance.
Section 280E applies to all businesses that sell cannabis in the United States, even if they operate in states that have legalized the drug’s sale. It effectively forces cannabis businesses to pay millions more in taxes than almost every other type of business.
The IRS issued the news release because some cannabis companies filed amended returns after the DOJ initiated a formal rulemaking process earlier this year to consider making cannabis a Schedule III controlled substance. The companies were trying to claim deductions that were initially disallowed under Section 280E.
It is unclear when, or even if, cannabis will be rescheduled. The DOJ published its initial notice of proposed rulemaking on May 21, 2024, and will accept public comments until July 22, 2024. After the comment period has ended, a hearing may be held prior to finalizing the final rule. The Supreme Court’s recent ruling abandoning the Chevron doctrine also adds some doubt to the rescheduling process. Because rescheduling has proceeded as a regulatory process initiated by the agencies and not Congress, it is now more vulnerable to challenge since courts are no longer obligated to defer to the expertise of administrative agencies when considering whether regulatory actions are authorized by the applicable statute.
In a previous alert, we outlined some of the tax benefits cannabis businesses should pursue if cannabis is rescheduled.
[View source.]
