Following the final order from the Department of Justice and the Drug Enforcement Administration to reschedule certain marijuana products from Schedule I to Schedule III of the Controlled Substances Act, the IRS issued a press release detailing some forthcoming tax guidance. This administrative shift carries substantial tax implications for businesses operating in the cannabis space, directly impacting their ability to deduct expenses.
Historically, the IRS rules for illegal substances have severely restricted state-licensed cannabis businesses. It states that “[n]o deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business… consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act)…”
This means that prior to this change, legal marijuana businesses could not deduct any of their expenses. They simply paid income tax on all their income at the federal level without the benefit of deductions.
Because the DOJ’s Final Order transfers FDA-approved marijuana products and marijuana subject to a qualifying state-issued medical license to Schedule III, according to the press release, this will no longer be the case. Accordingly, they’ll now be able to take deductions like any other business.
The agencies anticipate this will yield “significant positive tax consequences for businesses in the medical marijuana industry”. Thank you, Captain Obvious.
The question now becomes when does this take effect? For tax planning purposes, the timing of these changes is paramount.
According to the press release, the guidance is “expected to include a transition rule” basically saying that businesses can use the new rule for the entire tax year in which it was implemented. This will stop these businesses from needing to split the year when calculating their deductions.
When the legal cannabis trade began, two dispensaries approached us to handle their accounting and tax work. At the time, none of their expenses were deductible, but each had a plan to get around the law.
They opened side businesses under different EIN’s that would deduct all expenses via a management contract for the dispensary. The dispensary and the side organization holding the “management contract” were both S Corps, so all income and expenses would flow through to the owners’ 1040s, netting deductions against the income.
Each organization stated that the action was perfectly legal because an attorney had provided the idea.
I showed both of the dispensaries the door. Using a lawyer’s dodge to circumvent a federal tax law is no way to continue breathing free air.
Let me leave you with this…
On August 24, 2022, President Biden announced forgiveness of between $10K and $20K of student loan debt. The President also announced the extension of the student loan pause for a fifth and final time through December 31st of 2022.
On June 30, 2023, the U.S. Supreme Court issued its decision in Biden v. Nebraska, striking down the Biden administration’s student debt relief plan. In a 6–3 ruling, the Court held that the Department of Education lacked the authority under the HEROES Act to implement the proposed mass loan cancellation, concluding that such sweeping relief required explicit congressional authorization.
As a result of the ruling, the student debt relief program announced in August 2022 was invalidated and never took effect. The plan remains permanently blocked absent new legislation from Congress.
Following this decision, the Department of Education shifted its focus to relief programs grounded in existing statutory authority. These include income‑driven repayment forgiveness, Public Service Loan Forgiveness, and targeted discharge programs for specific borrower populations. Unlike the 2022 plan, these efforts were not before the Supreme Court and continue to operate under long‑standing provisions of the Higher Education Act.
Please remember that if you do receive loan forgiveness under these provisions it will probably trigger a taxable event.
Loan forgiveness is an economic benefit. As such, you’d probably need to pay income taxes on the transaction.
As always, if you’re having difficulties with your accounting and tax work, please contact us today.
We’re all going to get through this. Let’s get through it together…
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
Disclaimer: The content on our website or newsletter is provided solely for general informational purposes and should not be construed as tax, accounting, legal, investment, or professional advice of any kind. Accessing this information does not create, and is not intended to create, an accountant-client relationship. This information may not reflect the most current tax laws, accounting standards, or regulatory developments and may not apply to your specific jurisdiction or circumstances. It is not a substitute for consulting qualified professionals. Before making any decisions or taking any actions, you should seek advice from a professional who is fully informed of all relevant facts pertaining to your situation.
Tax-related content on this site is not intended, nor may it be used by any taxpayer, to avoid penalties that may be imposed under applicable tax laws. To comply with IRS requirements, we inform you that any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties or promoting, marketing, or recommending any transaction or matter addressed herein.
All information is provided “as is,” without any guarantee of completeness, accuracy, or timeliness, and without any warranty, express or implied, including but not limited to warranties of performance, merchantability, or fitness for a particular purpose. We disclaim all liability for any loss or damage arising from reliance on this information.
Links to third-party websites are provided for convenience only; we do not endorse or assume responsibility for their content. All materials are the property of our firm and may not be reproduced without prior written consent.