Marijuana Companies Are Trying To Avoid Paying Taxes They Owe Under 280E Provision Without A ‘Reasonable Basis,’ IRS Says

The Internal Revenue Service (IRS) is warning the marijuana industry that some companies have, without a “reasonable basis,” filled out a supplementary form in an attempt to take federal tax deductions that they’re prohibited from receiving under a provision known as 280E.

In a new notice, IRS said that certain cannabis firms are attempting to circumvent the federal ban the prevents tax deductions for activities involving Schedule I and Schedule II substances by completing the disclosure statement Form 8275.

That form is “used by taxpayers and tax return preparers to disclose items or positions, except those taken contrary to a regulation, that are not otherwise correctly disclosed on a tax return in order to avoid certain penalties,” the agency said.

In order to establish standing to qualify for tax relief with that form, there must be a “reasonable basis,” which IRS describes as a “relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is only arguable.”

To that end, IRS said it’s been receiving the supplemental forms from marijuana businesses in attempts to claim tax deductions they’re not eligible for under 280E so long as cannabis remains a Schedule I drug under the Controlled Substances Act (CSA). The agency said this is a clear example of a claim lacking a reasonable basis.

280E “applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana,” IRS said.

“A review of Form 8275 filings has revealed that some taxpayers have taken the position of disregarding the section 280E limitation using a variety of rationales that do not constitute reasonable basis,” it said. “Taxpayers should be aware that Form 8275 disclosures that lack a reasonable basis do not provide penalty protection. Taxpayers in this posture should consult a tax professional or advisor to determine how to come into compliance.”

The agency clarified in the new notice that 280E “does not prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

State-licensed cannabis businesses may be able to start taking broader federal tax deductions if the Biden administration’s push to move marijuana to Schedule III is ultimately successful. But IRS separately advised in June that just because that possibility is on the horizon doesn’t mean the industry can start claiming deductions in the interim.

These notices come as certain multi-state marijuana operators have been seeking refunds for what they say are excess taxes paid in past years due to 280E.

Multiple states have taken steps to provide state-level tax relief to marijuana businesses that are subject to the IRS 280E statute, but the federal rule has not yet changed. And it’s unclear when the proposed federal marijuana rescheduling rule might take effect. An administrative hearing process concerning the rule is currently underway.

Meanwhile, last year, Rep. Earl Blumenauer (D-OR) reintroduced a congressional bill that would amend the IRS code to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.

The latest notices come three years after the Congressional Research Service (CRS) noted in a 2021 report that the agency “has offered little tax guidance about the application of Section 280E.”

IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

The IRS update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”

Advocates Push Biden To Expand Marijuana Pardons Following Mass Clemency Action, With New Poll Showing Americans Would Support Such A Move