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IRS Marijuana Rules Overshadowed by Covid Relief, 2017 Tax Law

Jan. 27, 2021, 6:01 PM

Guidance for a brief section of the tax code that has frustrated the state-legal cannabis industry has been pushed low on the IRS’s priority list, an agency official said.

Section 280E of the tax code generally bars businesses “trafficking” in certain controlled substances from taking deductions and credits. With some form of marijuana use legal in dozens of states—and seven more states considering legalization of recreational marijuana—accountants have urged the IRS to clarify how broad that restriction is when it comes to state-legal businesses.

But finishing guidance tied to the 2017 tax law and Covid relief has taken precedence lately, Evan Hewitt, an attorney in the IRS Office of Chief Counsel, said during a virtual conference hosted by the American Bar Association’s Tax Section.

“Certainly we’re aware of the ever-increasing importance of Section 280E, as time goes on,” especially in the marijuana industry context “but potentially with other businesses as well,” he said Wednesday.

Guidance on the code section wasn’t included in the most recent iteration of the IRS’s list of top guidance objectives, Hewitt said.

State-legal cannabis businesses subject to Section 280E can reduce the amount of their revenues that get hit with taxes by the cost of their inventories. Accountants who work in this area often say it is difficult to figure out which expenses fall into that category, known as “cost of goods sold.”

Hewitt declined to clarify whether the restriction applies to other areas of the code, such as research expense write-offs, but said it “is broadly applicable to deductions and credits.”

Hewitt declined to say whether civil penalties or sanctions on a business would trigger the application of Section 280E, but said case law and the code section itself indicate “there’s no prerequisite” for a finding of criminal liability or charges. He advised going by the language of the code section itself, which applies the restriction to “trafficking.”

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To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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