Your CPA Called: Here's What The IRS Should Know About Cannabis Businesses

With tax season approaching, CPAs are calling on the IRS to prepare for potential changes impacting cannabis businesses. The American Institute of CPAs (AICPA) recently submitted recommendations to the U.S. Treasury and IRS, highlighting areas where guidance is needed to clarify tax obligations for cannabis operators if marijuana is reclassified as a Schedule III substance.

In May, the Department of Health and Human Services recommended moving marijuana from Schedule I to Schedule III, a change that would reduce its federal restrictions and potentially allow cannabis businesses to deduct operating expenses, currently restricted under Section 280E.

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AICPA's Recommendations: Preparing for Potential Tax Relief

In a letter to the Treasury, the AICPA laid out key recommendations to clarify federal tax obligations, potentially alleviating some of the industry’s tax headaches:

• Retroactive Expense Deductions: AICPA recommends that once marijuana is reclassified, businesses be allowed to retroactively apply tax deductions for the entire year. This would ease the 280E burden from the reclassification date onward.
• Clarifying Past 280E Challenges: To ensure smooth transitions, the AICPA calls for guidance on accounting changes, partnership bases, and depreciation rules affected by the removal of Section 280E.
• Uniform Tax Rules: They also suggest that tax relief should apply equally to all cannabis businesses, regardless of whether they sell medical or recreational products.
• Voluntary Disclosure Program: To further support businesses, AICPA proposes a voluntary disclosure program to assist companies newly exempt from Section 280E.

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"Since the beginning of the decriminalization and legalization of marijuana across a growing number of states, cannabis businesses and their CPAs have struggled to walk the tightrope of an industry that is locally legal, but federally illegal," said Melanie Lauridsen, AICPA's VP of Tax Policy and Advocacy. "With tax season approaching, federal guidance is crucial to help ensure compliance and clarity."

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