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Challenging 280E and Federal Tax Refunds in the Cannabis Industry

Posted by Nick McCrillis, Esq. | Mar 19, 2024

Cannabis companies have been unable to deduct normal business expenses due to section 280E of the federal tax code. The impact 280E has on the cannabis industry creates significant tax challenges for cannabis-related businesses (see our post from last year with detailed examples as to how this may affect your business).

Current Challenges to the Cannabis Tax Environment:

As you may know, 280E disallows business deductions for federally illegal businesses. Although cannabis-related businesses are still illegal federally, a growing number of states and municipalities continue to legalize and decriminalize cannabis. The federal government has largely left the states to implement and enforce their own cannabis laws. Based on this treatment, several large cannabis companies have taken a legal stance that the federal government's deference to state legislation is an inconsistent application of the Controlled Substances Act related to cannabis activities. There are also court cases challenging the scheduling of cannabis under the Controlled Substances Act. Currently, Trulieve Cannabis Corp. (a Florida-based cannabis company) filed amended tax returns to reallocate $143 million in business expenses, resulting in federal tax refunds totaling $113 million over the three year period. Trulieve's challenge utilizes a medical cannabis pathway; however, depending on the results from the legal challenges, the federal tax treatment of both adult use and medical cannabis companies may be impacted.

These legal challenges, although also having larger sweeping effects, present a significant opportunity for cannabis businesses. If cannabis businesses win the legal battles in court, 280E may not apply to cannabis businesses, resulting in the opportunity to deduct business expenses and provide significant tax savings.

The effective tax rate for cannabis businesses has been astronomical, resulting in significant financial challenges and even many business closures. Recently, Maine changed their state tax laws to allow deduction of business expenses for Adult Use cannabis businssess, creating an even playing field between cannabis businesses and other businesses in the State of Maine. The challenge to 280E provides an opportunity to also align federal tax treatment with other businesses.

What this means for you:

Many businesses saw state tax savings with the implementation LD 1063, allowing business expenses to be deducted from their taxable income as of January 1, 2023. If 280E is no longer applicable, cannabis businesses will be able to take advantage of significant federal tax savings. Not only would this provide business advantages going forward, but previous treatment of 280E may also come into question.

In order to preserve your right to take advantage of this, amended tax returns or a protective claim should be filed for all applicable years. You have the right to file an amended return for up to 3 years after the date you filed your original return or 2 years after the date you paid the tax, whichever is later. This means that your deadline for filing an amended 2019 tax return may have passed, but you may still be able to file an amended 2020 tax return (in addition to 2021, 2022, and 2023 tax returns). While the resolution of the battle for rescheduling (or de-scheduling) cannabis under the Controlled Substance Act and 280E applicability remains unsure at this time, the preservation of your right to file amended tax returns for prior years is critical and could result in hundreds of thousands of dollars in federal tax savings.

Please always engage your cannabis tax attorney and CPA with any significant business decisions. We help with optimizing your business structure, tax planning for transactions, tax opinions, tax disputes, and audits.

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Nick McCrillis is a registered patent attorney admitted to the US Patent and Trademark Office and the United States Tax Court. He advises and assists the firm's clients in a variety of industries on various intellectual property matters throughout the United States. In addition, Mr. McCrillis advises and represents the firm's clients throughout Maine's Medical and Adult Use cannabis programs on state and federal related tax matters and cannabis banking laws.  Learn more about Nick McCrillis by clicking here.

Caseiro Burke is a boutique law firm that specializes in intellectual property law and cannabis compliance and licensing in the State of Maine. We offer clients creative, cost-effective and reliable legal solutions in all intellectual property and Maine cannabis law matters.

DISCLAIMER:  No blogs produced by Caseiro Burke shall be considered legal advice.

About the Author

Nick McCrillis, Esq.

Nicholas A. McCrillis is a licensed attorney practicing in intellectual property law, corporate law, and commercial finance law. Nick is a Maine native with an undergraduate degree from the University of Maine at Orono and a law degree from the University of Maine School of Law. Nick handles matt...