The recent Supreme Court decision overturning the Chevron doctrine has sent shockwaves through the regulatory landscape, with potentially significant ramifications for the cannabis industry. Tax professionals serving cannabis clients need to be aware of how this ruling may impact their clients' tax situations and future planning.
1. Rescheduling Efforts in Jeopardy
The most immediate concern for the cannabis industry is the potential derailment of efforts to reschedule marijuana from Schedule I to Schedule III. This rescheduling, which was being pursued through regulatory channels, could have provided significant tax relief for cannabis businesses by allowing them to deduct ordinary business expenses under Section 280E of the Internal Revenue Code.
With the Chevron doctrine overturned, there's a high likelihood that any rescheduling efforts will face increased judicial scrutiny and potential legal challenges. As Deb Tharp of NuggMD puts it, "rescheduling is already functionally dead as a matter of policy." This means that cannabis businesses should not count on near-term relief from the burdensome effects of 280E.
2. Prolonged 280E Applicability
Given the uncertain future of rescheduling efforts, tax professionals should advise their cannabis clients to prepare for continued applicability of Section 280E. This provision prohibits businesses engaged in trafficking Schedule I or II controlled substances from deducting ordinary and necessary business expenses other than cost of goods sold (COGS).
Tax planning strategies should focus on:
- Maximizing allowable deductions under COGS
- Exploring alternative business structures to potentially mitigate 280E impact
- Maintaining meticulous records to support all claimed deductions
3. Increased Regulatory Uncertainty
The Supreme Court's ruling introduces a new era of regulatory uncertainty. As Andy Fois, chair of the Administrative Conference of the United States, notes, "agencies looking at what they do a little bit differently. And if they find that the statute is ambiguous or unclear in any way, they're not going to push it, they're not going to stretch, stretch it or push the envelope."
For cannabis businesses, this could mean:
- Less aggressive interpretations of tax laws by the IRS
- Potential challenges to existing cannabis-related regulations
- A more conservative approach to new regulatory guidance
Tax professionals should advise clients to stay conservative in their tax positions and be prepared for potential changes in regulatory interpretations.
4. Increased Importance of Congressional Action
With the courts now likely to take a more active role in interpreting statutes, the importance of clear legislative action has increased. As the article states, "Congress does have the power to fix all of this." For meaningful change in cannabis taxation, including potential relief from 280E, direct congressional action may now be necessary.
Tax professionals should:
- Keep clients informed about relevant legislative developments
- Encourage clients to engage with industry associations advocating for legislative changes
- Be prepared to quickly adjust tax strategies if new legislation is passed
5. Potential for Legal Challenges
The new legal landscape may open up opportunities for challenging existing cannabis regulations, including tax-related rules. However, such challenges could be a double-edged sword, potentially leading to both positive and negative outcomes for the industry.
Tax professionals should:
- Stay informed about ongoing legal challenges in the cannabis space
- Be prepared to advise clients on the potential risks and benefits of participating in or supporting such challenges
- Consider how potential outcomes of these challenges might affect long-term tax planning
The Supreme Court's decision to overturn the Chevron doctrine has created a new era of uncertainty for the cannabis industry, particularly in terms of taxation. While the full implications of this ruling will take time to unfold, it's clear that hopes for near-term tax relief through regulatory rescheduling have dimmed considerably.
Tax professionals serving cannabis clients should advise a conservative approach to tax planning, with a focus on compliance with existing rules like 280E. At the same time, they should remain vigilant for new opportunities that may arise from legislative action or successful legal challenges. As always in the cannabis industry, adaptability and careful planning will be key to navigating this evolving landscape.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.