A Democratic congresswoman is appealing to a GOP-controlled House committee to advance legislation allowing marijuana businesses to take federal tax deductions they’re currently barred from utilizing under an Internal Revenue Service code known as 280E.
During a “Member Day” hearing before the House Ways & Means Committee, newly appointed Congressional Cannabis Caucus co-chair Rep. Dina Titus (D-NV) made the case for prioritizing the modest marijuana reform to address the industry’s “outdated tax treatment.”
“Like gaming, cannabis has now spread to many states, and it’s a legitimate source of jobs and tax revenue,” Titus said. “It’s legal for medical purposes in 39 states and [recreational] uses in 24 states.”
“Despite this, the outdated scheduling of cannabis as a Schedule I drug means that those who work in the legitimate industry in those states where it’s legal have to jump through hoops to operate just like any other small business does,” she said, adding that the issue at hand—IRS code 280E—falls under the Ways & Mean Committee’s jurisdiction.
280E has long been a source of hardship and frustration for the industry. First enacted in the 1980s as a way to block cartel kingpins from writing off yachts and fancy cars, it stipulates that businesses are ineligible for certain deductions if their income is derived from an illegal drug that falls under Schedule I or II of the Controlled Substances Act.
While they may qualify for state-level deductions, the federal restriction ultimately means that marijuana businesses are subject to a significantly higher taxable income, increasing their effective tax rate up to around 70 percent.
“Section 280E drastically increases prices for consumers and harms businesses that are legitimate in these states, thereby sending people to the illegitimate market where prices are lower,” Titus said at the hearing last week. “Again, as co-chair of the Cannabis Caucus, I hope we can come back and work with this committee to see that we can’t begin to treat cannabis businesses like any other small businesses that operate in so many of our districts.”
Titus and Rep. Ilhan Omar (D-MN) replaced now-retired Reps. Earl Blumenauer (D-OR) and Barbara Lee (D-CA) as the Democratic leaders on the caucus earlier this month, and they’ve both advocated for comprehensive reform, including an end to federal cannabis prohibition altogether.
Titus has been particularly vocal about revising federal marijuana laws to address industry issues she’s observed among cannabis businesses in her state, and she recently visited two Nevada operators to discuss their unique challenges given the federal-state policy disconnect.
Meanwhile, in 2021 the Congressional Research Service (CRS) noted in a 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.”
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 marijuana rescheduling rule might take effect to solve the issue federally. An administrative hearing process has been delayed (and regulatory actions from federal agencies overall have been largely frozen under an order by newly inaugurated President Donald Trump).
Separately, IRS recently offered clarification for marijuana businesses amid a rule change related to reporting requirements for certain transactions in an effort to curb tax evasion.
The agency has also been focusing on addressing tax compliance issues with state-licensed cannabis businesses.
For example, last month IRS warned the 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 280E.
State-licensed cannabis companies may be able to start taking broader federal tax deductions if the push to move marijuana to Schedule III that was initiated by the Biden administration is ultimately successful. But IRS separately advised last 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.
A Democratic congresswoman is appealing to a GOP-controlled House committee to advance legislation allowing marijuana businesses to take federal tax deductions they’re currently barred from utilizing under an Internal Revenue Service code known as 280E. During a “Member Day” hearing before the House Ways & Means Committee, newly appointed Congressional Cannabis Caucus co-chair Rep. Dina Read More
