Contact Us

Breaking: IRS Targets Cannabis Businesses in New Section 280E Compliance Push

  • December 22, 2024
  • Mark R. Waller

On December 12, 2024, the IRS released a statement highlighting its continued efforts to ensure tax compliance, especially for businesses with complex returns. One key focus is Section 280E, a tax rule that presents unique challenges for cannabis businesses. If you’re in this industry, this is important news to understand! With the IRS actively reviewing disclosures like Form 8275, it’s critical to know how these changes may impact your tax strategy. You can read the full IRS announcement here.

Section 280E and Its Challenges

Section 280E denies deductions for business expenses incurred in the trafficking of controlled substances, as defined under federal law. While cannabis businesses operating legally under state law can deduct cost of goods sold (COGS), they cannot claim other deductions like rent, utilities, or advertising.

This limitation often puts cannabis businesses at a financial disadvantage, and some have turned to Form 8275 to disclose alternative interpretations of tax law.

Potential IRS Targets: Tax Positions Under Form 8275

Although not explicitly stated in the IRS notice, it can be inferred that the agency may focus on certain tax positions disclosed under Form 8275, such as:

  • Section 471(c) Accounting Methods: Businesses may argue that Section 471(c), which permits small businesses to use alternative inventory methods, allows for deductions beyond what Section 280E permits. This position may be appealing for cannabis businesses seeking relief, but without IRS or legal precedent, it remains speculative.
  • Anticipated Rescheduling of Cannabis: Some businesses have used Form 8275 to disclose positions based on the possibility of cannabis being rescheduled to Schedule III under the Controlled Substances Act. While such a change could impact the application of Section 280E, disclosures based on potential future events do not meet the “reasonable basis” standard required to avoid penalties.

The IRS’s Enforcement Priorities

The IRS has signaled its intent to crack down on improper tax positions, particularly those that attempt to circumvent Section 280E. Improper disclosures, speculative claims, or positions lacking reasonable basis may trigger:

  • Accuracy-Related Penalties: For substantial understatements of taxable income.
  • Heightened Audit Risk: Businesses relying on unsupported tax strategies are more likely to face scrutiny.
  • Financial and Operational Strain: Non-compliance can compound financial challenges already faced by cannabis businesses under Section 280E.

Steps to Protect Your Business

To avoid becoming a target of IRS enforcement, cannabis businesses should focus on compliance:

  1. Work with a CPA Firm: Experienced CPAs understand the nuances of Section 280E and can guide businesses through compliant tax strategies.
  2. Calculate COGS Accurately: Ensure deductions align strictly with IRS guidelines to minimize taxable income while staying compliant.
  3. Avoid Speculative Positions: Disclosures under Form 8275 based on potential future events, like rescheduling, are unlikely to withstand IRS scrutiny.

How Morem & Waller CPAs Can Help

At Morem & Waller CPAs, we specialize in helping cannabis businesses navigate the complexities of Section 280E and other tax challenges. Our team ensures your tax strategies are compliant, defensible, and optimized for your business’s unique needs.

Contact us today to schedule a consultation and safeguard your business against unnecessary risks while staying compliant with IRS regulations.