AICPA asks IRS for updated cannabis tax guidance

The AICPA is asking the U.S. Department of Treasury and the IRS to issue new guidance to cannabis businesses and tax preparers in anticipation of a change to marijuana’s classification to a Schedule III controlled substance instead of a Schedule I, according to an Oct. 21 letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel. 

“Since the beginning of the decriminalization and legalization of marijuana across a growing number of states, cannabis businesses and their CPAs have struggled to walk the tightrope of an industry that is locally legal, but federally illegal,” Melanie Lauridsen, vice president of tax policy and advocacy for the AICPA said in a statement included in a release announcing the letter.  

“It’s imperative that the federal government’s tax administration bodies provide guidance to these profitable businesses and their advisors in advance of the rescheduling of marijuana to help ensure a clear understanding of their federal tax obligations and mitigate non-compliance,” Lauridsen said. 

The AICPA’s request comes several months after the Department of Justice issued a proposed regulation in May to change marijuana from a Schedule I controlled substance to Schedule III, which could provide some tax benefits because businesses that handle Schedule I substances are prohibited from taking tax deductions under Section 280E of the Internal Revenue Code. 

While that prohibition on business deductions applies to any business that “consists of trafficking in controlled substances” in Schedule I or II, by moving marijuana to the Schedule III classification “would allow marijuana businesses to deduct business expenses on federal tax filings,” according to a May 1 Congressional Research Service report.  

In the letter, the AICPA made several recommendations including: asking the IRS to allow cannabis companies to take deductions for the full tax year in which marijuana is rescheduled to Schedule III, as well as provide guidance ensuring that section 280E apply equally to businesses across states no matter whether they sell medical or recreational marijuana.  

“The main issue confronting cannabis businesses and tax professionals is a midyear change in the application of section 280E…In anticipation of marijuana rescheduling, cannabis businesses will need to begin tax planning (e.g., they may delay either making or incurring vendor payments in order to maximize deductibility of such expenses, delay equipment purchasing, prematurely filing returns assuming that marijuana will be rescheduled imminently) and taking tax positions without the benefit of IRS guidance,” states the letter, which is signed by Blake Vickers, chair of the AICPA’s tax executive committee.