IRS Says Cannabis Business Owners May Be Eligible for Qualified Business Income Deduction
According to the IRS, cannabis business owners operating as a pass-through entity will likely be able to claim a qualified business deduction on their taxes this year without challenge. The decision was announced on February 10, 2023 by IRS Office of Chief Counsel, Luke Ortner, during a panel session at the 2023 American Bar Association Mid-Year Tax Meeting.
As part of Ortner’s session, titled The Cannabis Minefield for Closely Held Businesses, he confirmed that the IRS has opted to not automatically challenge claims made by cannabis business operators claiming the IRC Sec. 199A deduction —a 20% deduction on the qualified pass-through business income reported at the 1040 level.
Tax professionals have long argued that cannabis business owners should be eligible for the deduction for various reasons, such as the deduction's legislative goals, the fact that it is not considered a deduction "paid" or "incurred" by the taxpayer (as restricted by IRC Sec 280E – see below), and because cannabis businesses are not specifically listed as an ineligible business under the regulations, among other reasons.
Currently, cannabis business owners are still subject to IRC Sec. 280E, which denies deductions paid or incurred from gross income (i.e., revenues less inventory acquisition or cultivation costs - or COGS) if engaged in the business of trafficking certain controlled substances listed as Schedules 1 and 2 of the Drug Enforcement Agency’s list, regardless of whether they are as growers, processors, service providers or dispensaries. “Plant-touching” businesses are considered to be trafficking.
While this decision was reported by Ortner, it is important for business owners to note that IRS has yet to issue formal guidance on IRC Sec. 199A eligibility for cannabis operators. Given the complexity of IRC Secs. 280E and 199A, business owners and operators should consult with a tax professional to determine potential eligibility for this deduction.
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