This is not going to be a surprise to most people reading this, but it will to some. Cannabis operators cannot deduct ordinary and necessary expenses that come with operating a business, such as costs for personnel, management, general and administrative expenses, interest, security, and rent. Why?
1. Internal Revenue Code Section 280E (§280E) states “no deduction or credit” is allowed for those trafficking a Schedule I or Schedule II substance.
2. As of March 2024, cannabis is currently a Schedule I substance.
3. “Trafficking” means buying or selling
4. Cost of sales or costs pertaining directly to the purchase, creation, or development of inventory are deductible because they are viewed as an adjustment to gross receipts, not a “deduction for credit”.
The lack of tax relief from the disallowance of these deductions (for Federal purposes – New Jersey does allow the deduction) coupled with the lack of banking and financing for the industry has led to financial ruin for many operators.
Professionals and operators within the cannabis industry have been questioning the constitutionality and applicability of §280E. It is arguable that, with the U.S. Department of Health and Human Services and many legislators recommending rescheduling in conjunction with the ever-growing number of states and districts legalizing recreational use (including Washington D.C.), the persecution and criminalization of those legally trafficking THC products is no longer a federal priority.
In simple terms, retailers can deduct the cost of the product. Cultivators and manufacturers can deduct the costs of making the product – both direct and indirect costs. Talk to an accountant about indirect costs.
In New Jersey, we also have wholesaler, distributor, and delivery licenses. How they are structured and operated will play a part in their tax treatment. Again, talk to an accountant knowledgeable in the industry.
The biggest news this week was Trulieve’s filing of amended federal tax returns for 2019, 2020, and 2021 claiming $143 million of refunds and amended state returns claiming $31 million of refunds. Of the $143 million claimed with the IRS, refund checks of approximately $113 million have been received to date.
While it is definitely good news, it does not mean §280E isn’t applicable or refunds will be given to all taxpayers. What can be done?
1. File an amended tax return in accordance with the statute of limitations. Generally, this means filing the return within three years of the due date of the original return, or within two years after the date they paid the tax, whichever is later.
2. File a protective claim allowing the taxpayer to comply with the statute of limitations but
request the refund at a later date.
There has been some discussion regarding the distinction between medical and adult use. Why is
this?
1. Congress bars the Department of Justice from using funds to prevent states from “implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”
2. If cannabis is no longer “illegal” because a state legalized it for medical purposes, it could be argued §280E is not applicable.
We encourage parties who may be impacted to conduct further research and seek professional advice.
HBK CPAs and Consultants’ Cannabis Solutions Group
Stacey Udell, sudell@hbkvg.com
Kurt Seifert, kseifert@hbkcpa.com
Jesse Hubers, jhubers@hbkcpa.com
