The Cannabis industry had some rumors in the last few months on a potential move from Schedule I substance which are considered hard drugs with no medical use and that are especially harmful for users due to abuse to a more relaxed Schedule III which are medical drugs with lower dependence. The current Biden administration has been more favorable to make that change as some surveys / polls indicate that seven out of ten Americans support the legalization of cannabis. Since 2013 that was legal in the State of Colorado, more and more States are legalizing cannabis / marijuana mainly to collect taxes from the sale of this substance (24 States are permitting cannabis for medical or recreational use as of the date of this post).
Still as of today, at the Federal level is considered a hard drug and that generates certain limitations regarding the deductibility of expenses other than the cost of goods sold (Section 280E) and the potential ability to use banks or major credit card processors as illegal from a Federal point of view.
26 U.S. Code § 280E – Expenditures in connection with the illegal sale of drugs
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Based on 280E, the only deduction is the cost of goods sold as the IRS guidance allows reducing the gross receipts (… Section 280E does not, however, 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.)
In June 2024, the IRS released IR-2024-177 noted that this topic might be subject to changes in the near future “... On May 21, 2024, the Justice Department published a notice of proposed rulemaking with the Federal Register to initiate a formal rulemaking process to consider rescheduling marijuana under the Controlled Substances Act. Until a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.”
The Cannabis industry is a multi billion industry in the United States and due to the complexity of the legal status (discrepancy between Federal and State law), professional guidance from attorneys, CPAs and IRS Enrolled Agents is required when accounting and preparing returns for these entities, among other legal and compliance requirements (zoning, licensing, etc.)
Link Associated Press (April 2024) – US poised to ease restrictions on marijuana in historic shift, but it’ll remain controlled substance
Link WSJ (April 2024) – The Big Problem for Marijuana Companies? What to Do With All That Cash
