Congressional Researchers Examine Whether Denying Marijuana Businesses Tax Deductions Violates Constitutional Rights
As the federal government continues to weigh a decision on rescheduling marijuana, a new report from the Congressional Research Service (CRS) has shed light on the tax implications for cannabis businesses under current law. The report, released last week, analyzed the application of a federal tax code that prohibits marijuana businesses from taking deductions and credits, and whether this practice violates constitutional rights.
Under the Controlled Substances Act, marijuana is classified as a Schedule I drug, which means that it is treated differently from other businesses for tax purposes. The IRS code 280E disallows taxpayers from taking deductions and credits related to marijuana businesses, a provision that has been challenged by the industry but has generally been upheld in court.
The CRS report highlighted a recent case, Northern California Small Business Assistants, Inc. v. Commissioner, in which a marijuana business challenged the IRS’s disallowance of deductions. The court ultimately upheld the code, ruling that the disallowance of deductions does not constitute a “penalty” under the Eighth Amendment’s Excessive Fines Clause.
The report also noted that the IRS has provided limited guidance on the application of 280E, leaving many marijuana businesses uncertain about how to comply with federal tax laws. In 2020, the IRS did provide some guidance, stating that while cannabis businesses cannot take standard deductions, they can reduce their gross receipts by their properly calculated cost of goods sold to determine their gross income.
The CRS report’s findings come as the Justice Department is working to finalize a process to move marijuana from Schedule I to Schedule III of the CSA, a move that could potentially provide relief to the industry. However, the exact timeline for this process is unclear, and advocates are urging lawmakers to press the Justice Department for an update on the status of the rescheduling effort.
A recent poll found that 83% of respondents support the president’s executive order directing the Justice Department to expedite the rescheduling process, while 7% oppose the move and 10% have no opinion.
