Here's How the termination of 280E could impact the taxation of cannabis enterprises

Regulated cannabis producers are eagerly anticipating a potential revision of marijuana’s classification to a Schedule 3 controlled substance by the U.S. Drug Enforcement Administration. This reclassification could lead to a reduction in tax liabilities imposed under Section 280E of the federal tax code, which would be a significant relief for these businesses.

According to Thomas Ostrander, a partner at the Philadelphia-based law firm Duane Morris, reclassifying marijuana from Schedule 1 to Schedule 3 would put an end to the impact of 280E on the cannabis industry. This means that state-regulated businesses could now deduct all their ordinary and necessary business expenses for federal income tax purposes, just like any other company.

The cannabis industry is being advised by the law firm about various essential tax implications that would arise due to rescheduling.

- Past taxes paid under 280E are unlikely to be refunded.
- Unpaid past taxes due under 280E would probably still be owed.
- If rescheduling is completed sometime in 2024, it’s possible that 280E taxation on the marijuana industry could end retroactive to Jan. 1, 2024.

The marijuana industry is well aware that government policy reform, such as rescheduling, can be highly unpredictable in terms of its timing.

Ostrander cautioned that it is difficult to predict when this will occur.

“Next year is not a guarantee,” is a reminder to not make assumptions about the future. It is important to stay present and not take things for granted.

Cannabis companies suffer under the weight of 280E

Earlier this year, Whitney Economics, a research firm based in Portland, Oregon, reported that state-legal marijuana companies paid over $1.8 billion in excess taxes compared to non-cannabis businesses in 2022 due to 280E regulations.

According to Whitney, there is a prediction that the surplus tax payments will increase to $2.1 billion by the year 2023.

According to Whitney, marijuana retailers frequently face a tax rate in excess of 70% due to the 280E provision.

Lowering tax payments could offer new opportunities for U.S. cannabis companies, especially considering the current burden they face.

MariMed CEO and President, Jon Levine, is optimistic about the potential end of 280E for the cannabis industry. The Massachusetts-based multistate operator could potentially save millions of dollars each year with this change.

According to MJBizDaily, the individual stated that the additional millions in cash flow each year could aid in the company’s growth, as well as research and development. Additionally, he expressed a desire to give back to employees in light of the company’s continued expansion.

Levine cautioned that it would be premature to assume that the rescheduling of events will definitely happen.

Levine pointed out that the industry has been waiting for years for marijuana banking reform through different versions of the SAFE Banking Act, but so far, nothing has materialized.

Levine expressed optimism by stating that they firmly believe rescheduling will take place in the near future.

MariMed is currently making plans for the year 2024 while considering the possibility that 280E taxation will continue to be enforced.

According to Levine, rescheduling the cannabis plant and removing 280E taxation would greatly benefit new cannabis businesses that are struggling with a negative cash flow and heavy debts.

According to Aaron Miles, the chief investment officer of MSO Verano Holdings based in Chicago, the company has previously postponed the taxes it owes under 280E. However, they are now taking a more proactive approach and carefully managing the balance.

Verano is estimated to face a hefty tax bill of around $80 million to $100 million this year due to the 280E taxation, which applies to both state and federal taxes.

According to the expert, the savings amount from the reduction of 280E taxes at the state level may vary in the future due to the state governments’ actions.

According to Miles, Verano is currently receiving positive feedback regarding the likelihood of marijuana rescheduling.

He stated that Congress is currently in a state of chaos, but fortunately, the approval of this matter does not need to go through them. He expressed his belief that the current administration is highly motivated to ensure that this matter is successfully resolved.

Preparing for Changes to 280E

According to Ostrander, if marijuana is rescheduled to Schedule 3 in 2024, it could potentially put an end to the cannabis industry’s 280E taxation for the tax year starting on January 1, 2024.

According to him, if rescheduling was implemented during the middle of the year, it wouldn’t be logical to ask companies to calculate their tax liability for only half the year under 280E.

According to Ostrander, unpaid taxes owed under 280E are a concern for some marijuana companies. Even after rescheduling, these companies would likely still be required to pay their past taxes to the IRS.

According to Ostrander, it is improbable that previous corporate cannabis taxes paid under 280E would be refunded retroactively.

“He said that the primary goal of the IRS is to generate revenue to support the functioning of the United States government.”

According to the statement, it is uncommon for them to return money unless there is a significant reason to do so, which would be in the form of a refund claim.

Patients Mutual Assistance Collective Corp., which is a subsidiary of Statehouse Holdings, a California-based cannabis company, is currently being represented by Ostrander and Duane Morris. The case they are handling concerns the company’s tax liability under 280E for the year 2016.

The argument being put forth is that the tax violates the constitution as it is considered a direct tax that is not distributed among the states according to population.

Ostrander insisted that the so-called tax is actually a penalty. “We also assert that it is not a tax at all,” he emphasized.

If you are looking to get your money back, you are seeking a refund.

According to Ostrander, the litigation regarding the constitutionality of 280E taxation has not been heard in court yet. He acknowledged that previous legal challenges have failed, but added that those cases used a different legal strategy.

Ostrander suggests that cannabis companies should file protective refund claims for their taxes paid under 280E as a precautionary measure.

According to the expert, it is important to make the claims to ensure that your right to get a refund is protected in case 280E is deemed unconstitutional and the court applies the ruling retroactively. He emphasizes the need for taking this step to safeguard your financial interests.

Trulieve Cannabis Corp., a Florida-based MSO, has announced its own initiative to secure a 280E tax refund of $143 million.

Trulieve has not disclosed its precise legal approach, but it has stated that it does not believe it is obligated to pay the taxes.

To prepare for the potential end of 280E if marijuana is rescheduled, Ostrander advises cannabis businesses to maintain accurate records of their operations and ensure timely filing of tax returns.

According to Ostrander, tax compliance issues are a common occurrence within the cannabis industry.

According to him, many individuals are filing their returns late, which can lead to hefty penalties and interest. Late filing can even prompt the IRS to come to your doorstep for collection.

“The government has the power to shut down companies, but I haven’t witnessed any closures so far,” said the speaker.

If your company already has 280E tax liabilities, Ostrander recommends considering different options for payment, including installment agreements, offers in compromise, or partial-pay installment agreements.

According to Ostrander, keeping the creditors at bay is possible with various options available. However, he emphasized that the IRS holds more power than the typical creditors.

Take the debt you owe to the Internal Revenue Service seriously. It is vital to open all the mail you receive and act promptly within the given time frame to avoid any unfavorable outcomes. These notices provide you with an opportunity to get relief or protection, so be sure not to ignore them.

Verano’s Miles suggests that cannabis operators should prepare themselves for the end of 280E taxation by being strategic and conservative with their cash. It is recommended that they tighten up their balance sheets in the meantime.

“He continued by emphasizing that the operators who survive will be the best in the current situation.”

“It’s highly unlikely for those who were unaware of how to manage their businesses before the SAFE Banking Act passage or Schedule 3 rescheduling to suddenly acquire the knowledge to do so afterwards.”