Congressional researchers analyze 280E marijuana tax penalty and legislative options

In a new report released this month, Congressional researchers examine tax policies and restrictions for the marijuana industry – and how these could change if any number of federal reform laws are passed.

The Congressional Research Service (CRS) analysis focuses on a section of the Internal Revenue Services (IRS) code called 280E, which prevents cannabis companies from receiving certain federal tax deductions or credits that other companies regardless of their state legality be available. However, they are still required to pay taxes on their nationwide illegal income.

“Marijuana ‘s Schedule I status means that marijuana companies are treated differently than many other companies for tax reasons,” CRS said. “However, Congress has extensive powers to change the tax treatment of marijuana companies.”

“The legislative history of Section 280E shows that Congress has enacted the provision to codify a well-defined public policy against drug trafficking,” the report said.

The provision was made in 1982 to prevent drug traffickers from writing off expenses from their taxes. However, it is now widely applied to government-licensed marijuana producers, processors, and dispensers, significantly increasing their effective tax rates compared to companies in other industries.

280E applies to substances in Annex I and II of the Regulated Substances Act (CSA).

“Recent legislative proposals aim to relax federal marijuana restrictions or narrow the gaps between state and state marijuana regulations,” the new CRS report said. “Many of these proposals would change the tax treatment of marijuana companies by rescheduling or writing off marijuana under the CSA or making marijuana-specific exemptions.”

“After these proposals, Section 280E would no longer prohibit marijuana companies from receiving deductions and credits,” it said.

While several bills to legalize cannabis at the federal level were put in place at the last session – including the Marijuana Possibility of Reinvestment and Eradication Act (MORE), they haven’t been recast this year.

Senate Majority Leader Chuck Schumer (D-NY), Senate Chairman of Finance, Ron Wyden (D-OR), and Sen. Cory Booker (D-NJ) are in the process of passing laws to end cannabis criminalization and Promote social justice to develop. I have met with proponents on how best to work this proposal out.

Meanwhile, the House Judiciary Jerrold Nadler (D-NY) recently said he would reinstate the MORE law soon.

A number of standalone bills have also been tabled in Congress over the years to remove the 280E penalty motion on marijuana businesses, but none have ever received a hearing or vote.

Currently, however, the marijuana industry continues to face tax policy challenges under the umbrella of the ban. And CRS noted that the IRS “offered little tax guidance for the application of Section 280E”.

In an update last year there was some evidence stating that while cannabis companies cannot make standard deductions, 280E does not prohibit a participant in the marijuana industry from reducing their gross income by the properly calculated cost of goods sold, to determine their gross income. “

The IRS update appeared to be in response to an internal audit report from the finance department released last year. The Inspector General of the Tax Administration Department had criticized the IRS for failing to adequately inform taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publish guidelines specific to the marijuana industry”.

One note that the IRS would like to make particularly clear to cannabis companies is that they will still have to pay income tax. And CRS articulated this in its report.

“Like non-marijuana companies, marijuana companies are subject to taxation on all their income,” it says. “Under federal law, all income is taxable, including income from illegal activities. In contrast, not all expenses are deductible from a taxpayer’s gross income. “

However, paying these taxes has proven onerous – both for cannabis companies and the IRS itself. The agency’s director told Congress last month that it was “preferable” for state-licensed marijuana companies to pay taxes electronically as the current largely cash-based system is complex and inefficient.

Former Treasury Secretary Steven Mnuchin said in 2019 that he would like Congress to approve laws to resolve the cannabis banking problem, pointing out that the IRS is using “cash rooms” as an example for paying taxes from these companies. had to build problem.

CRS also discussed laws that “sought to improve marijuana companies’ access to banking and financial services,” such as the Safe and Fair Enforcement Act (SAFE), which the House passed in 2019, and also as part of two COVID -19 aid packages. “Many financial institutions are unwilling to provide joint banking products and financial services to government-sanctioned marijuana companies because federal law imposes civil and criminal liability on financial institutions that handle marijuana-linked money.”

While there may be this reluctance, federal data released earlier this month shows that the number of banks and credit unions saying they serve marijuana companies appears to be stabilizing.

These numbers fell continuously for three quarters in a row – partly due to revised reporting requirements of the Financial Crimes Enforcement Network (FinCEN) and also due to the coronavirus pandemic. However, the latest report signals that the trend is taking off.

Legislators in the Senate and House of Representatives have tabled new bills in recent days to address the marijuana banking problem.

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