IRS Publishes Code Section 280E Guidance to Cannabis Taxpayers: Here’s What You Need to Know!

On September 12, 2020, the IRS published guidance intended to assist cannabis license holders with various aspects of tax compliance in the form of frequently asked questions (FAQs). The guidance, which can be found here, seems to be an attempt to at least partially “develop and publicize guidance specific to the marijuana industry.”

It appears that the IRS provided this guidance in response to a report entitled, “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance” which can be found here.  The report was issued by the U.S. Treasury Inspector General for Tax Administration (“TIGTA”), an agency within the U.S. Treasury which provides independent oversight to IRS activities.

Within its report, TIGTA suggested, “the IRS develop a comprehensive compliance approach for the marijuana industry, including a method to identify businesses in this industry and track examination results; develop and publicize guidance specific to the marijuana industry, such as guidance on the application of I.R.C. § 471(c) in conjunction with I.R.C. § 280E; leverage publicly available information at the State level and expand the use of existing Fed/State agreements to identify nonfliers and unreported income in the marijuana industry; and increase educational outreach towards unbanked taxpayers making cash deposits regarding the unbanked relief policies available.”

The report continues with the IRS’s response to the recommendations, “The IRS agreed with five of the six recommendations. The IRS did not agree with the recommendation to develop and provide guidance on I.R.C. § 471(c), citing other priorities. However, the IRS added that once the 2019-2020 Priority Guidance Plan is resolved, developing guidance to ensure coordination between I.R.C. §§ 280E and 471(c) will be considered.”

The potential concerns of cannabis companies addressed in the IRS FAQs include whether or not federally illegal sellers of marijuana are subject to income and employment taxes, if cannabis taxpayers are eligible for payment plans and temporary delays on collections for taxes they can’t pay, if taxpayers are subject to penalties for unpaid taxes, if taxpayers would be subject to penalties if taxable income is changed due to an audit, if sellers of marijuana can deduct expenses when calculating taxable income, and lastly if taxpayers need to report cash payments received in excess of $10,000 to the IRS.

To follow is a summary of the IRS’s answers to the questions, but it is important to note that nothing within this newest IRS guidance is new information that was not previously provided:

• Federally illegal sellers of marijuana are subject to income and employment taxes;
• Cannabis taxpayers are eligible for payment plans and temporary delays on collections for taxes they can’t pay;
• Taxpayers are subject to penalties for unpaid taxes;
• Taxpayers could be subject to penalties if taxable income is changed due to an audit; and
• Taxpayers need to report cash payments received in excess of $10,000 to the IRS.

The second to the last question addresses the deductibility of expenses by marijuana sellers. The answer is that all deductions and credits are disallowed.  Taxpayers are allowed; however, to reduce gross receipts by cost of goods sold (COGS) calculated consistent with Code section 471.  This is not different than the IRS guidance provided a Chief Counsel Memo released on January 23, 2015.  As matter of fact, the Chief Counsel memo is referenced within the guidance.

There are a number of outstanding questions and diversity in positions regarding what types of expenditures can be characterized as inventoriable costs and ultimately included as COGS, which would reduce gross receipts versus which types of expenditures should be characterized as expenses which would be subject to Code Section 280E and not deductible.

To navigate the complexities of tax compliance and Code Section 280E, taxpayers should consult with experienced cannabis industry advisors.  Bridge West is one of the first accounting firms to focus solely on the cannabis industry. Since 2009, the practice has expanded to more than 400 cannabis and hemp clients nationwide. To schedule a complimentary and confidential consultation, please contact us.

Calvin Shannon, CPA, CVA, is a Principal of Bridge West and has over 20 years of experience providing tax, audit, estate planning, and trust services. With a deep understanding of the challenges cannabis clients face, Calvin is skilled at understanding client’s challenges and working with them to develop and implement innovative and unique solutions. Calvin assists cannabis businesses address the industry’s unique and ever-evolving issues. He enjoys working with cannabis clients to understand their business needs and provide timely solutions. Calvin can be reached at: cshannon@bridgewestcpas.com and 651-287-6327.