The IRS has been firing warning shots across the marijuana industry’s bow in recent weeks, reminding individual businesses that Form 8275 is not a legal 280E workaround. In other words, cannabis businesses cannot file the form as a means of reducing their tax liabilities. The question of whether the IRS goes on the offensive, in terms of enforcement, remains to be seen.
The Underlying Issue
The underlying issue for cannabis companies is Section 280E of the Internal Revenue Code. Enacted in 1981 as a result of a court case against a drug dealer, the section prohibits companies from deducting ordinary expenses if their businesses involve illicit controlled substances.
Marijuana is currently a Schedule I controlled substance under federal law. For the purposes of the Controlled Substances Act, this makes it an illicit substance. And for tax collection purposes, Section 280E applies to all cannabis businesses for the simple fact that they are dealing in a Schedule I controlled substance.
The Form 8275 Issue
As for the Form 8275 issue, a recent report from Marijuana Moment says it boils down to a number of multi-state cannabis operators now attempting to recoup some of their business expenses by filing the form. They believe the form gives them the right to claim normal business expenses because those expenses cannot be claimed any other way on a federal tax return. The IRS obviously disagrees.
Form 8275 is designed to give taxpayers and prepares a place to disclose items or positions that are not addressed adequately on other parts of a tax return. It is essentially a disclosure form that allows taxpayers and preparers to avoid certain kinds of penalties. Examples of items that might be listed on this form include:
- Non-tax shelter items linked to a substantial understatement of income tax.
- Items that could subject a preparer or taxpayer to penalty due to disregarding the rules.
- Items that could lead to preparer penalties due to unreasonable positions.
Unfortunately for cannabis businesses, the law explicitly states that traffickers of illegal drugs cannot claim a reasonable basis for using the form. Therefore, they are ineligible to recoup business expenses by filing the disclosure.
Why It Matters
If you are not involved in the cannabis business, you may not understand why all of this matters. It is really a financial issue.
Businesses in nearly every other industry can deduct regular business expenses from their revenues before calculating their tax liabilities. As such, they only pay tax on their profits. It’s reasonable. In the business world, profits equal income. And income is what income tax is based on.
Cannabis businesses, like the Beehive Farmacy medical cannabis dispensary in Brigham City, Utah, are unable to write off their business expenses. It boils down to this: their businesses are not considered legitimate for federal tax purposes because they are dealing with illicit substances. Therefore, they do not get the benefit of writing off business expenses.
Rescheduling Would Change Things
It’s interesting to note that, among businesses dealing in drugs, only those dealing in Schedule I and Schedule II substances are affected by Section 280E. Those dealing in Schedule III and lower can write off business expenses like any other company.
The federal government is considering moving marijuana to Schedule III. That would be big. It would change everything for legal operators who currently face an unreasonable tax burden that prevents them from competing with black market operators.
Until rescheduling takes place, cannabis businesses are subject to Section 280E. The IRS has been clear that such businesses cannot recoup their expenses by filing Form 8275.