Should You Pursue 280(e) Refunds?

On the heels of Trulieve filing for over $143 million in tax refunds, the cannabis world is all waiting with bated breath to see whether or not the canna giant is going to be the first in line to put pressure on the tax code that currently disallows the deduction of operating expenses.

Following an aggressive opinion piece published last week by MJBiz Daily, which threatens cannabis businesses into filing for refunds or facing the wrath of their investors, here are some actual professional thoughts as to whether or not this is a legitimate direction you need to consider.

IRC 280(e) strictly prohibits the deduction of any operating expenses for an enterprise that traffics in a Federally controlled substance. The general language of the tax code makes it challenging to “creatively” work within spite of the best efforts of tax attorneys and accountants. We have seen countless clients misled to believe that multiple legal entities and other creative strategies would help them avoid the cumbersome tax laws, only to be disappointed with court decisions like the one in the Harborside case, where the multiple entity methodology was struck down.

The CHAMP case is the court case most often cited by cannabis businesses, mainly because it’s one of the only ones that was successful against the IRS in challenging its 280(e) position. But business owners need to look closely at this case and understand that in CHAMP the business in question had substantial economic activity outside of cannabis sales and the court ruling was based upon the fact that the company would operate regardless of cannabis sales to the counseling and caregiving patients of that business. In other words, CHAMP was a counseling service that happened to provide cannabis to some of its patients. This is not the case with most cannabis operators.

Circling back to Trulieve, while the documents are not a matter of public knowledge yet, it’s widely believed that the canna giant filed for refunds intending to cite Gonzales v. Raich, which was essentially a case involving California medical cannabis program participants suing the Federal government stating that the Feds no longer had authority to regulate cannabis under the Controlled Substances Act.

Let’s break that down…

1) The plaintiffs lost that case, and the Supreme Court decision was that the Feds do indeed still have authority to regulate cannabis under CSA,

2) If the plaintiffs had won (hypothetically), we would not all be sitting here holding our breath and waiting for a rescheduling decision,

3) There are arguments that the REASONS for the Supreme Court decision in this case are no longer valid and that if a similar statement was heard again, the Supreme Court would decide differently, presenting the opportunity for the Supreme Court to ultimately free cannabis from the CSA control.

Here’s the problem: this could all take years to decide, and while rescheduling is likely to come this year, it’s unlikely that it would provide any retroactive tax relief. It’s also expected that a rescheduling decision will be met with court woes of its own, as several interest groups have already threatened massive legal action meant to inhibit a rescheduling process.

If you’re exhausted and confused, it’s understandable, but stay with me.

What’s a cannabis business owner to do then?

The MJBiz Daily piece makes it sound like cannabis business owners are stupid not to file refund requests and immediately start operating as if cannabis is no longer covered under CSA, but is that a good move?

It’s aggressive; let’s just put it that way.

Worst case scenario? You spend a lot of money to amend prior year returns to take all your operating expenses and get told “no,” you’re out the cost of the professional fees with no tax refunds. You assume all your operating deductions on currently prepared returns and get audited. The IRS disagrees with your position, and you end up in tax court paying back money plus legal fees, penalties, and interest.

Best case scenario? You get refunds for amending returns that don’t have an expired statute of limitations and stop having humungous tax bills due to the IRS.

Does the best-case sound too good to be true? That’s because no one can tell us the likelihood of the best-case happening. While these legal arguments are legitimate, and it seems imminent that we will see movement on rescheduling and 280(e) changes soon, the facts of tax law NOW are that cannabis businesses do fall under CSA, and thus 280(e) rules regardless of whether we think it’s fair or constitutional. Absent actual changes to the law, filing for refunds with the hope of future law changes can be dangerous.

Given all the ambiguous information, I think it’s essential for business owners to do their risk-reward, cost-benefit analysis. There is potential monetary gain to taking a position and starting to file your cannabis business as a traditional business would, but there are also still genuine monetary risks.

We’re willing to proactively work with our customers to discuss your business in-depth. These decisions will not look the same for everyone and will largely depend on your risk-reward analysis, but not proactively having the conversation is not the answer either.

If you’re looking for help in deciding whether amending returns, or an aggressive stance on 280(e) is the right decision for your business, reach out to us for help.

Christine Gervais

Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.

At Cultivate Consulting Group, we understand that you want to achieve lasting financial stability that leads to the legacy you envision for your company and family. The problem is traditional CPA firms are not known for proactive communication, which leads to uncertainty when it comes to your business’s tax efficiency and financial standing.
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