How the cannabis industry could be poised to save billions

Although it’s now widely accepted that the ongoing marijuana rescheduling process by the Drug Enforcement Administration will save the U.S. cannabis industry hundreds of millions of dollars if not billions per year, there are still questions about when such savings will materialize and how far the policy shift will go to benefit marijuana companies, multiple tax attorneys told Green Market Report.

And the biggest question is: When will cannabis companies formally be exempt from 280E? That’s the provision in the federal tax code that bars anyone trafficking in Schedule I or II drugs from claiming standard business tax deductions.

Reason for optimism

“The best we can get is 2024. If it gets changed in 2024, by law, it will be effective as of the date it’s published in the federal register,” said Nick Richards, a partner at Denver-based Greenspoon Marder and a former lawyer at the Internal Revenue Service.

“It’s not going to have a bearing on this year’s filing season. That seems pretty clear,” he said.

Amber Littlejohn and Daniel Corsaro, both attorneys with Ice Miller LLP, echoed Richards’ point on the timeline and noted that it’s inextricably tied to the conclusion of the rescheduling process itself, which is underway at the Drug Enforcement Administration.

Littlejohn believes rescheduling will conclude within a few more months, meaning the cannabis industry could realize substantial tax savings in less than a year. Most of the previous rescheduling examples have taken about a year from when the Department of Health and Human Services sent its scheduling recommendation to the DEA, Littlejohn said. That’s a step which happened last August.

“If it follows every other controversial rescheduling decision that’s been remotely relevant to this process, it would wrap by the end of the year,” Littlejohn predicted.

Richards added that while he’s skeptical that rescheduling can be completed this year, he’s been hearing loud and clear from connections in Washington, D.C., that that is exactly what Biden wants to see.

“The Biden administration has its foot on the gas pedal. It wants something to happen,” Richards said.

Proceed with caution

It’s still quite possible that rescheduling won’t be finished by the end of the year, several legal experts contend, in which case it could be done away with altogether if former President Donald Trump beats Biden in November and subsequently orders the Department of Justice to halt rescheduling completely.

But assuming rescheduling does finish this year, the next question is which precise date rescheduling will go into effect, Corsaro said. Depending on the date of implementation, 280E may still apply for cannabis companies for part of the relevant tax year, perhaps even most of it. That would force marijuana businesses to crunch the numbers to figure out just how much of the year can be exempted from 280E, he said.

“The other question, which is kind of up in the air right now, is if it gets resolved in 2024, will it be retroactive to Jan. 1? Or would it be the actual date of resolution going forward?” Corsaro said. “My personal suspicion is it will be … from the date of resolution going forward.”

From a practical standpoint, that could mean some complicated calculations for part of the tax season, Corsaro said, but it also means that businesses need to start preparing their books and records for a completely new approach to filing their federal taxes, by justifying expenses they will be able to write off for the first time ever.

“Plan today as if 280E is going to be around forever,” Corsaro advised. “Don’t jump the gun, but model out what your income, your taxable income, would be without 280E, so you know what your picture is going to look like once it changes.”

There’s also a policy question for the IRS to answer, Richards said, on whether the agency will choose to make the 280E exemption retroactive for marijuana businesses. Taxpayers can formally request retroactivity, a step he definitely recommends because the IRS could decide to grant such requests. That could save plenty of companies millions more in refunds, Richards said.

“There’s a procedure for a taxpayer to make a request for a retroactive effect,” Richards said. “What I’m telling my clients is, no, it’s not going to make your past liability magically go away. It won’t have retroactive effect, but I do think on your 2024 return you should make the request.”

Corsaro said he’s also advising clients to make the same move, in part because that’s the approach being adopted by most of the major multistate operators that are publicly traded. They’re following the lead of Florida-based Trulieve Cannabis Corp., which filed amended federal returns for the statutory limit of three prior years and already obtained a federal refund of $113 million.

Gambling on the courts

Richards said that approach has stemmed from an ongoing high-profile legal case against the DOJ that aims to overturn any federal criminal liability for state-legal marijuana companies.

The lawsuit, Canna Provisions vs. Garland, inspired Trulieve’s tax gambit, Richards said, because the idea is that it creates enough legal justification for the IRS to issue refunds to Trulieve, and it will take multiple years for the IRS to win the $113 million back if it ultimately determines via audit that Trulieve’s amended tax returns were incorrect.

“Canna Provisions is not a tax case. What they wanted to do is get out of 280E, so they initiated the tax side of that fight. So now we have these two (cases) that are out in front,” Richards said. “Trulieve was brave enough to make the first step and disclose it, and that’s kind of opened up the floodgates for all the other companies to do it.”

But because there’s a three-year statute of limitations for amending federal tax returns, Richards noted, there’s a ticking clock for everyone else in the marijuana trade. That’s one of the reasons there’s been a wave of public companies making similar amended filings since February when Trulieve made the move.

“There’s a real chance that this works. Trulieve did it for 2019 forward, so if it does work, and you’re another cannabis company and you don’t do something now, you’re going to lose the ability to file an amended return for 2020. You already lost it for 2019,” Richards said. “You’re going to see all the big companies take this step, because it’s more risky not to.”

Richards cautioned that it’s still a risk, because it’s a near-certainty that the IRS will audit Trulieve and other cannabis companies that file such amended returns, but time is probably on Trulieve’s side, given both the rescheduling process underway and the Canna Provisions case.

“It’s almost certain there’ll be an audit,” Richards said. “The fact that Trulieve got their refund doesn’t mean they’re right, but it does mean the IRS recognizes there’s some exposure there for them. It’s not a frivolous argument. It could work.”

But because the Canna Provisions case could go all the way to the U.S. Supreme Court over multiple years, that’s giving time and cover to businesses willing to make the same multiyear 280E tax bet as Trulieve, Corsaro said. Federal law may wind up changing before Trulieve’s tax refunds or any other marijuana companies’ get challenged by the IRS, potentially making the entire issue a moot one, Corsaro said.

“The rescheduling process will be done before we know if there will be any litigation on that,” Corsaro predicted of Trulieve’s amended returns.

“I’ve been counseling clients, if you’ve got a lot at stake, and you believe the unconstitutionality claims (in the Canna Provisions case) are strong, file protective claims for refunds now, because you don’t know how long the court system is going to take to resolve it. And you’d hate to be in a situation where it’s struck down but you didn’t file paperwork in time to recover money you otherwise could have,” Corsaro said.