Proposed Cannabis Rescheduling
The cannabis industry is on the verge of a significant shift as the Drug Enforcement Administration (DEA) is expected to finalize the rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substance Act later this year or in 2025. This change will have far-reaching tax implications for cannabis businesses, primarily due to the potential inapplicability of IRC section 280E.
Under current law, section 280E prohibits businesses that traffic in Schedule I or II substances from deducting their expenses, resulting in effective tax rates as high as 70% for some cannabis operators. The move to Schedule III would exempt cannabis businesses from 280E, potentially saving the industry billions in taxes.
The critical question for tax professionals is the effective date of the final rule and its impact on the availability of deductions for cannabis businesses. It remains unclear whether the inapplicability of 280E will be effective from the date the final rule is published or if it will be retroactive for the entire year in which the rule is published. This decision will have a significant impact on cannabis businesses' tax liabilities and planning strategies.
Tax advisers are calling for IRS guidance on various issues arising from the rescheduling, including:
- Determining income for the period when 280E applies and when it does not, if the effective date falls mid-year.
- Handling depreciation for assets placed in service before rescheduling and the potential eligibility for bonus depreciation.
- Calculating base spend for R&D expenses incurred prior to rescheduling.
- Potential changes to inventory methods, as 280E has encouraged the use of expansive inventory methods.
Another area of concern is the treatment of prior-year tax balances related to 280E. Some large cannabis operators have already filed amended returns claiming 280E refunds, with at least one reportedly receiving substantial refunds. This situation could lead to inequities in the industry if smaller operators do not take similar actions or if the IRS pursues audits and collection of prior-year balances after rescheduling.
The rescheduling of cannabis could significantly impact the tax landscape for businesses in the industry, and staying up-to-date on the latest developments and IRS guidance will be essential in providing effective tax planning and compliance services to these clients.
In light of the proposed rescheduling, tax professionals should proactively engage with their cannabis clients to assess the potential impact on their tax liabilities and develop strategies to optimize their tax positions. This may include reviewing existing tax filings, considering the timing of asset acquisitions and dispositions, and evaluating the potential benefits of amending prior-year returns.
As the cannabis industry continues to evolve, tax professionals play a vital role in navigating the complex and ever-changing tax landscape. By staying informed and proactively addressing the tax implications of cannabis rescheduling, we can help our clients in the cannabis industry thrive in this new era of opportunity and challenge.
Christine Gervais
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.
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