The American Institute of CPAs (AICPA) is urging the U.S. Department of the Treasury and the IRS to issue new guidance for cannabis businesses and tax filers in anticipation of the expected rescheduling of marijuana from a Schedule I controlled substance to Schedule III. The request was made in an October 21 letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel.

"Since marijuana decriminalization and legalization have gained traction in more and more states, cannabis businesses and their CPAs have been walking a tightrope—the industry is legal at the state level but still illegal at the federal level," said Melanie Lauridsen, AICPA Vice President of Tax Policy & Advocacy, in a statement accompanying the letter released Thursday.

"It is crucial that the federal tax administration provides guidance to these profitable businesses and their advisors before the rescheduling of cannabis, to ensure they clearly understand their federal tax obligations and reduce the risk of noncompliance," Lauridsen added.

The AICPA's request follows a proposed rule issued by the Department of Justice in May to move marijuana from a Schedule I controlled substance to Schedule III. This change could bring some tax benefits, as businesses dealing with Schedule I substances are barred from tax deductions under Internal Revenue Code Section 280E.

Although the deduction ban applies to any business "trafficking in Schedule I or II controlled substances," moving marijuana to a Schedule III classification "would allow cannabis businesses to deduct business expenses on federal tax returns," according to a May 1 Congressional Research Service report.

In the letter, the AICPA made several recommendations, including: asking the IRS to allow cannabis businesses to take deductions for the entire tax year in which marijuana is rescheduled to Schedule III, and providing guidance to ensure Section 280E is applied equally across states for businesses selling medical or recreational marijuana.

"The primary issue facing cannabis businesses and tax professionals is the mid-year change in Section 280E... Given the impending rescheduling of cannabis, cannabis businesses will need to begin tax planning (e.g., they may defer payments or incur vendor expenses to maximize the deductibility of such expenses, defer equipment purchases, or file returns prematurely assuming cannabis will be rescheduled imminently) and take tax positions without IRS guidance," the letter, signed by Blake Vickers, Chair of the AICPA Tax Executive Committee, stated.