Cannabis taxes have become a hotter and hotter topic among accountants. States in half the country now have laws making cannabis legal, but the Feds still are a no go on the otherwise state-legal businesses.
This creates quite the tax conundrum, especially since IRC 280(e) specifically prohibits deductions from being taken when a business is considered to be “trafficking in a federally controlled substance.”
Recently, major cannabis conglomerate and multi-state operator Trulieve filed amended tax returns asserting they were owed $143 million in tax refunds from the Internal Revenue Service (IRS). Cannabis accountants everywhere now are waiting with bated breath to see the outcome of the request.
While the details of the amended returns were not made public, a couple different tax arguments have been circulating in the industry recently. With more accountants getting over the stigma of servicing legal weed companies and jumping in to serve these organizations, the outcome of previously un-challenged tax theories is being watched by players across the country.
The biggest debate right now is the question of IRC 471(c) and whether or not it applies to cannabis and provides a work around for legal cannabis businesses to essentially skirt 280(e). The 471 section of the code was originally written for manufacturing entities as part of the Tax Cuts and Jobs Act, creating more flexibility for smaller businesses to account for their inventory and cost of goods sold.
But the flexibility has caught the eye of the cannabis industry. In short, 471(c) makes an argument for cannabis company’s ability to put nearly every non-deductible expense under 280(e) into the cost of goods sold on their tax return. Because COGS is considered an adjustment to revenue and not a deduction, it’s not disallowed under 280(e).
The theory has yet to be tested in tax court but it seems with the Trulieve challenge that we might be seeing some of these positions be tested sooner rather than later.
The other theory is that disallowed 280(e) expenses are still considered normal operating expenses for the business and thus cannot be considered “permanent” but rather “temporary” tax differences and that the sale or exit from the business would trigger these amortized costs to be available to be used as basis when a business is sold.
If that’s the case, does the argument also apply that they could be amortized into inventory over time and otherwise added to COGS during the life of the business? The answers are wildly gray.
While cannabis tax attorneys have started toting these positions, most small business clients don’t want to sign up to be the history making court cases that will eventually set the IRS precedent for answering these questions.
Trulieve’s challenge and request for refunds however has raised a lot of eyebrows and businesses across the 23 states where weed is legal are holding out hope that the outcome might point for a brighter future in their own business.
Under current laws, when you factor in state income and excise taxes, cannabis businesses could be paying as high as 80% of their revenues in taxes. A change in tax law would undoubtedly impact the industry in a tremendous way.
