IRS leaves no wiggle room on higher taxes for legal cannabis companies

By Steve Gelsi

U.S. says legal cannabis companies cannot take the usual tax deductions

The Internal Revenue Service has said cannabis companies must continue to pay hundreds of millions of dollars in income taxes under the 280E tax code measure despite a move by the federal government to reschedule cannabis to a less-restrictive category of drugs.

"The law with respect to the schedule or classification of marijuana has not changed," the IRS said in a news release on Friday. "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."

The IRS said cannabis companies have filed amended returns, "but these claims are not valid."

A spokesperson for the pro-cannabis industry group U.S. Cannabis Council said Tuesday: "The IRS release is a powerful reminder that 280E remains a major impediment to profitability in the regulated cannabis industry."

While state-legal cannabis operators will keep up their legal efforts against 280E, "the only sure way to end the tax penalty ... [is] to move cannabis down to Schedule III," the spokesperson said.

Spokespeople for four of the largest U.S. cannabis companies - Trulieve Cannabis Corp. (TCNNF), Curaleaf Holdings Inc. (CURLF), Verano Holdings Corp. (VRNOF) and Cresco Labs Inc. (CRLBF) - did not comment on the IRS's statement.

The 280E tax code, which dates from the 1980s, came in response to a cocaine dealer claiming standard business deductions for drug proceeds. The rule closed this tax loophole to all drugs classified as either Schedule I or Schedule II under the U.S. Controlled Substances Act.

Marijuana has been categorized as a Schedule I substance since 1970, but the Biden administration has proposed moving it to Schedule III, which would exempt it from 280E.

Also read: Cannabis stocks rise as U.S. moves to reclassify pot as less dangerous

Trulieve said in May that it would see "hundreds of millions" in tax savings in coming years if it were exempt from 280E.

The company told analysts on its first-quarter financial update in May that it has been challenging the applicability of 280E to its business by filing amended tax returns.

The company said it received $113 million in refunds thus far but added that "final resolution of our approach may ultimately take years" to resolve.

"We continue to accrue an uncertain tax position on our balance sheet, while realizing lower cash tax payments," the company said.

Curaleaf has said it would have saved more than $150 million in 2024 if 280E wasn't in effect for cannabis.

"Curaleaf has further reviewed ... with legal counsel the basis for filing federal tax returns on grounds of Section 280E of the tax code does not apply to its business," the company told analysts May 9 on its first-quarter conference call.

Cresco Labs said May 15 that it's in the process of filing protective claims for 2020 through 2022 to allow it to file an amended return in the future.

The company calculated that its 2024 cash flow would increase by $70 million without 280E.

An IRS spokesperson said the agency does not comment on individual cases.

-Steve Gelsi

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07-02-24 1701ET

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