A Note to CANY Members:
As the administration prepares to potentially reclassify cannabis to Schedule III, the implications for our industry—specifically regarding Internal Revenue Code §280E—are profound. However, relief may not be automatic for past years.
Our partners at Bowers Accountants & Advisors have prepared the following urgent guidance regarding “Protective Refund Claims.” We urge all members to review this information to ensure you preserve your rights to potential retroactive tax refunds before the statute of limitations expires.
Potential Retroactive Tax Relief from §280E and The Need to Consider Protective Refund Claims
To Our Members of CANY:
As you may be aware, recent reports indicate that the Administration is preparing to issue an executive order directing federal agencies to initiate the process of reclassifying cannabis to Schedule III under the Controlled Substances Act. While no final announcement has been made, the possibility of reclassification carries significant tax implications for cannabis operators, particularly as it relates to the long-standing limitations imposed by Internal Revenue Code §280E.
Background: Potential End of §280E for Cannabis Businesses
Under current federal law, §280E disallows deductions for ordinary and necessary business expenses for any business trafficking in Schedule I or II controlled substances. If cannabis is reclassified to Schedule III, §280E would no longer apply, as the statute applies only to Schedules I and II.
This prospective change is widely recognized as one of the most consequential tax developments the industry has ever faced. Eliminating §280E could materially reduce federal income tax liabilities going forward, restoring the ability to deduct payroll, rent, insurance, marketing, professional fees, and other standard business expenses.
Possibility of Retroactive Relief
At this time, the federal government has not issued guidance indicating whether relief from §280E would be applied retroactively to previously filed tax years. Historically, administrative changes of this nature are applied prospectively unless specific guidance provides otherwise.
However, because the industry has paid significantly higher taxes under §280E for years, various trade groups and professional associations are now actively advocating for some level of retroactive relief. Although retroactivity is uncertain and cannot be assumed, the magnitude of the potential tax impact warrants close attention to the issue.
Importance of the Statute of Limitations
The IRS may issue refunds only for tax years that remain open under federal statute-of-limitations rules. Generally, a taxpayer must claim a refund within the later of:
- Three years from the date the original return was filed, or
- Two years from the date the tax was paid.
Once the statute of limitations expires for a particular year, the IRS is legally barred from issuing a refund—even if the law later changes or the taxpayer would otherwise have been entitled to one.
Protective Refund Claims
Given the uncertainty surrounding retroactive application of §280E relief, cannabis businesses should consider whether it is prudent to file protective refund claims for any tax years that are close to closing under the statute of limitations.
A protective refund claim is a formal filing with the IRS that:
- Preserves your right to a refund if a future event (such as the rescheduling of cannabis) ultimately results in overpaid tax,
- Must be submitted before the statute of limitations expires for the affected year, and
- Does not require final dollar amounts or completed calculations when filed.
Bowers can assist your business in evaluating eligible years, preparing, and filing protective refund claims to ensure that your rights are preserved while awaiting potential guidance on retroactive 280E relief.
Recommended Next Steps
We recommend that cannabis operators:
- Review the statute-of-limitations calendar for all open federal tax years.
- Identify any years that will close within the next 6-12 months.
- Monitor developments from the IRS, Treasury, and the Administration regarding the potential rescheduling of cannabis and related tax guidance.
Our team at Bowers is available to assist with analyzing your tax years, preparing protective refund claims, and evaluating the potential financial impact of the anticipated policy change.
Please contact us with any questions or to discuss next steps.
Sincerely,
Richard Farley Jr., CPA
Tax Partner
Bowers
rif@bcpllc.com
315-234-8158
