Some fairly new guidance notes, issued by the IRS on the 12th of September may provide a means by which businesses involved in legal marijuana can claim appropriate tax deductions for their currently not allowable trading expenses.
The problems for the marijuana industry has been the Internal Revenue Code Section 280E, which states:-
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted”
Marijuana is a schedule 1 substance and so gets caught by this provision.
Earlier this year the IRS had been threatening to audit more deeply cannabis operators who they suspect had not been complying with Section 280E and claiming expenses such as rent and utilities, either directly, like any other business, or by accounting for them as part of the cost of their inventories.
The new guidance appears to imply that businesses can reduce gross receipts using an accounting method available under Section 471. Section 471, enacted with 2018’s tax law, enables businesses grossing less than $25M in revenue to deduct a greater portion of their expenses.
Until now, the question of whether it applies to marijuana businesses has been a source of controversy. The move, which highlights an already available method and does not introduce any changes to the tax code, could be aimed at getting more marijuana businesses to declare their income and pay their taxes.
Whilst, on the face of it, this could well be a means of allowing cannabis and marijuana businesses the means to calculate their tax liability in a manner similar to others it seems more likely that the IRS wants to ensure that all those in business declare their earnings and are taxed accordingly.
The unfairness of Section 280E may well have resulted in business deciding to hide or disguise their income from cannabis entirely resulting in a total loss of tax.