IRS Announces Its Position for Taxpayers That Sell Marijuana
By Leo Parmegiani, CPA, Partner and Christopher Migliaccio, JD, Partner
In its recent IR-2024-177 announcement, the IRS warns taxpayers that marijuana is still considered a Schedule I controlled substance – despite a proposed rulemaking that would remove it from the list – and, thus, asks taxpayers that sell marijuana not to file amended returns nor original returns claiming the non-applicability of Internal Revenue Code (IRC) Section 280E.
This IRS announcement indicated that its position will remain until a final rule is published by the Justice Department (DOJ) permanently excluding marijuana from Schedule I Controlled Substance status. The IRS stated that taxpayers must remain vigilant since improper returns could result in significant penalties, interest and the possibility of the statute of limitations not running. In addition, companies that issue reports on the US GAAP basis should be aware of the accounting implications of the Uncertain Tax Position and tread lightly in their reporting.
IRC Section 280E
IRC 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trades or businesses that consist of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act (CSA). This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana because trafficking marijuana remains illegal under the CSA.
Justice Department Proposed Rulemaking on Marijuana Reclassification
On May 16, 2024, the Justice Department announced that the Attorney General submitted to the Federal Register a notice of proposed rulemaking initiating a formal rulemaking process to consider moving marijuana from a Schedule I to Schedule III drug under the CSA. The DOJ stated that the rescheduling of a controlled substance follows a formal rulemaking procedure that requires notice to the public and an opportunity for comment and an administrative hearing. This proposal starts the process where the Drug Enforcement Administration will gather and consider information and views submitted by the public in order to make a determination about the appropriate schedule. During that process and until a final rule is published, marijuana remains a Schedule I controlled substance.
Certain tax practitioners, prior to this announcement, argued that there is a position to take on a tax filing, albeit with some or significant risk, that Section 280E no longer applies and all business-related deductions available to other taxpayers can be deducted. Many were filing amended tax returns claiming refunds of previously paid taxes. However, the IRS states in IR-2024-177 that the law with respect to the schedule or classification of marijuana has not changed. Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment.
PKFOD Observation and Recommendation
PKFOD believes that companies that sell, produce or otherwise engage in the marijuana business should heed the IRS warning and hold off filing amended returns until the DOJ rulemaking process is final and that marijuana is officially not considered a Schedule I Controlled Substance. Given that the DOJ process is active, our team will be keeping a close eye on what’s happening in Washington, DC and continue to provide key updates.
Contact Us
If you have any questions on this important issue, please contact your PKF O’Connor Davies tax advisor or any of the following:
Leo Parmegiani, CPA, MST
Partner
lparmegiani@pkfod.com
Christopher Migliaccio, JD
Partner
cmigliaccio@pkfod.com
Kelly Lin, EA
Partner
klin@pkfod.com
Jeffrey Gittler, CPA
Partner, Cannabis Niche Co-Practice Leader
jgittler@pkfod.com