Cannabis Taxes, 280E, & DEA
Are You Ready to Risk Opting Out of 280E?
by John V. Pellitteri, CPA
Partner, Cannabis Advisory Services
Grassi Advisors and Accountants
We asked one of our CPA partners at Highway 33 Capital for his assessment of how Federal tax policy will impact the cannabis industry in 2025. Here is an aggressive approach to consider branded the Trulieve Argument.
As we head into 2025 significant headwinds will be affecting the cannabis industry in a number of ways. The lack of liquidity flowing into the industry being one of the most important. From public and private MSO’s right down to startups, capital is very hard to come by and debt incredibly expensive. This has left many in the industry to make difficult decisions given very few options. One option many clients have started to utilize this past year is the Trulieve Argument, where they have taken a position that cannabis is not subject to 280E and are able to deduct general and administrative expenses which is not allowed under the current 280E regime.
The DEA (Drug Enforcement Administration) has been in the process of rescheduling cannabis from a current Schedule I drug and subject to IRS code section 280E, to a Schedule III drug currently outside of 280E. While the DEA has just paused the rescheduling decision indefinitely, approval of rescheduling would create a huge bump in cash flow to cannabis businesses and a lifeline to continue to build current operations as well as expand. The Federal HHS (Health and Human Services Administration) has already recommended the DEA reschedule based upon numerous medical benefits that are derived from cannabis, a key criteria to getting it off of Schedule I.
What the outcome will be is uncertain and when this will happen or if it will happen is still up for debate. But until that happens cannabis companies are expected to abide by the current interpretation of the IRS tax code section, 280E. 280E limits the amount a cannabis company can deduct from sales to be only cost of goods sold in order to arrive at taxable income. In some instances, the effective tax rate the company pays can be as high as 60 – 70% with of all the disallowed deductions. Trulieve as well as other cannabis companies have begun filing tax returns as far back as 2020 opting out of section 280E and looking to increase their cash position.
What is right for you?
I would generally say that companies in good financial & cash flow positions – which, yes, there are very few, but nonetheless – those companies have decided to stay with paying the taxes and abide by 280E. It’s a good idea for these companies to file protective claims to enable the companies to go back and file amended tax returns and claims for refunds in the event that 280E was deemed to not apply to the cannabis industry after a certain year.
Many folks I collaborate with believe that a plausible argument can be made that the IRS should go back to year 2018 as the triggering point when cannabis should have been rescheduled as Schedule III rather than the current Schedule I designation and therefore 280E would no longer apply to those years beginning 2018.
Many companies both private and public including Trulieve have decided to opt out of 280E for years 2022 and subsequent years with originally filed tax returns as well as amending tax returns for prior years, to recoup taxes and receive refunds. This strategy comes with a number of risks that each company needs to weigh prior to deciding to go down this aggressive path. If the IRS examines your current year return or any amended tax returns and deems the tax position taken is incorrect and without merit not only will you be responsible for the tax but also interest, late payment penalties, and accuracy-related penalties as well. The accuracy-related penalties alone could amount to 20% of the tax you owe. This should not be taken lightly when evaluating if opting out of 280E is right for your company.
For many companies it was a well thought out decision, examining the risks versus reward. Some decided not to go forward with it and others decided it was right for them knowing the risks. For those companies that decide to opt out of 280E on current year tax return or prior years amended tax returns, it is critically important to follow all IRS processes and procedures accurately when taking aggressive tax positions, including a substantive reason as to why you believe your cannabis company is not subject to 280E. This needs to reported and disclosed with the tax return filings. Should those steps be taken as part of this process the IRS could view this as a reasonable claim and not enforce the 20% accuracy-related penalties.
Conclusion:
In the end a business decision will need to be made if these risks outweigh the potential benefits. The stakes are high! So it is best to be well informed and knowledgeable on any direction you take and make sure you are guided by a well versed team of professionals with knowledge of this industry through this process.