CPAs Urge IRS to Prepare for Tax Relief as Marijuana Reclassification Looms

As tax season rapidly approaches, the American Institute of Certified Public Accountants (AICPA) is urging the Internal Revenue Service (IRS) to get ready for a potential shift in the tax landscape for cannabis businesses. The AICPA recently submitted a set of recommendations to the U.S. Treasury and IRS, highlighting areas where clear guidance is needed to clarify tax obligations for cannabis operators if marijuana is reclassified as a Schedule III substance.

In May, the Department of Health and Human Services recommended moving marijuana from its current Schedule I classification to Schedule III, a move that would significantly reduce federal restrictions on cannabis. This reclassification could potentially open the door for cannabis businesses to deduct operating expenses, a privilege currently denied under Section 280E of the Internal Revenue Code.

The AICPA’s recommendations are designed to proactively address the potential tax relief that could arise from marijuana’s reclassification. Key areas of focus include:

*

Retroactive Expense Deductions:

The AICPA recommends that once marijuana is reclassified, businesses should be allowed to retroactively apply tax deductions for the entire year. This would provide much-needed relief from the burden of Section 280E, easing the financial strain on cannabis businesses from the reclassification date onwards.

*

Clarifying Past 280E Challenges:

To ensure a seamless transition, the AICPA advocates for comprehensive guidance on accounting changes, partnership bases, and depreciation rules, all of which are significantly impacted by the removal of Section 280E restrictions.

*

Uniform Tax Rules:

The AICPA strongly suggests that any tax relief should be applied equally to all cannabis businesses, regardless of whether they sell medical or recreational products. This ensures a level playing field and fosters fair competition within the industry.

*

Voluntary Disclosure Program:

To further support businesses, the AICPA proposes a voluntary disclosure program to assist companies newly exempt from Section 280E. This program would provide valuable assistance and guidance during the transition period.

Melanie Lauridsen, AICPA’s VP of Tax Policy and Advocacy, emphasized the need for clear federal guidance during this crucial time. “Since the decriminalization and legalization of marijuana across a growing number of states, cannabis businesses and their CPAs have struggled to navigate the complex legal landscape. This industry is locally legal but federally illegal, creating a significant challenge for businesses and their tax obligations. With tax season approaching, federal guidance is critical to ensure compliance and clarity.”

The AICPA’s recommendations underscore the importance of a proactive approach to preparing for the potential reclassification of marijuana. By providing clear guidance and addressing key issues related to tax obligations, the IRS can help ensure a smooth transition and facilitate the growth and prosperity of the cannabis industry.