IRS Reaffirms Cannabis as Schedule I Substance; Section 280E Still Applies

WASHINGTON — The Internal Revenue Service (IRS) has issued a reminder that cannabis remains classified as a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E until any final federal rule is published.

Despite ongoing legislative discussions and proposed changes, the law regarding the classification of cannabis has not yet been amended. Consequently, taxpayers seeking refunds of taxes paid under Section 280E by filing amended returns are not entitled to such refunds. The IRS has noted that some taxpayers have been submitting these claims, which are invalid under current law, and is taking measures to address them.

Understanding Section 280E

Section 280E disallows all deductions or credits for amounts paid or incurred in the conduct of any business involved in the illegal trafficking of a Schedule I or II controlled substance, according to the federal Controlled Substances Act. This includes businesses that legally sell cannabis under state law.

However, Section 280E does not prevent businesses in the cannabis industry from reducing their gross receipts by the properly calculated cost of goods sold to determine their gross income.

Legislative Developments

On May 21, 2024, the Justice Department published a notice of proposed rulemaking in the Federal Register, initiating a formal process to consider rescheduling cannabis under the Controlled Substances Act. Until a final rule is enacted, cannabis remains a Schedule I substance, and the limitations of Section 280E will continue to apply.

Taxpayers and businesses involved in the cannabis industry should remain informed about current laws and regulations to ensure compliance with federal tax obligations.