Source: https://www.kahntaxlaw.com/category/cannabis-business/
Timestamp: 2019-12-15 10:07:38
Document Index: 39620685

Matched Legal Cases: ['§61', '§280', '§280', '§280', '§280', '§280', '§280', '§162', '§280', '§280', '§11360', '§ 280', '§ 280', '§ 280', '§ 280', '§ 162', '§ 280', '§ 162', '§ 164', '§ 167', '§ 280', '§ 280', '§ 280', '§ 280', '§ 261', '§ 280', '§ 161', '§ 164', '§ 167', '§ 164', '§ 167', '§ 280', '§ 280', '§ 280', '§ 812', '§162', '§ 280', '§ 280', '§280', '§ 812', '§162', '§280', '§280', '§280', '§280', '§280', '§280', '§280', '§162', '§280', '§280']

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December 9, 2019 /0 Comments/in Appeals of Tax Audits, Audits, Cannabis Business /by Tax Attorney
While the sale of cannabis is legal in California as well as in a growing number of states, cannabis remains a Schedule 1 narcotic under Federal law, the Controlled Substances Act. As such businesses in the cannabis industry are not treated like ordinary businesses. Despite state laws allowing cannabis, it remains illegal on a federal level but cannabis businesses are obligated to pay federal income tax on income because I.R.C. §61(a) does not differentiate between income derived from legal sources and income derived from illegal sources.
Taxation Of Cannabis Businesses
The Sixteenth Amendment of the U.S. Constitution prohibits the Federal government from taxing “gross receipts”. In Edmondson vs. Commissioner, 42 T.C.M. (CCH) 1533 (T.C. 1981), the Tax Court decided that Jeffrey Edmonson, self-employed in the trade or business of selling amphetamines, cocaine, and cannabis, was permitted to deduct his business expenses resulting from his trade. Discomforted by this outcome, the following year Congress enacted I.R.C. §280E, disallowing all deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act.
Under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Cannabis, including medical cannabis, is a controlled substance. While I.R.C. §280E disallows cannabis-related businesses to deduct “ordinary and necessary” business expenses, it would be unconstitutional for the IRS to disallow businesses to deduct Cost Of Goods Sold when calculating gross income. This concept was first applied in the Tax Court case of Olive vs. Commissioner Of Internal Revenue, 139 T.C. 19 (2012).
I.R.C. Section 280E IRS Tax Audits
It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits. IRC §280E is at the forefront of all IRS cannabis tax audits and enforcement of §280E could result in unbearable tax liabilities.
Proving deductions to the IRS is a two-step process:
• First, you must substantiate that you actually paid the expense you are claiming.
• Second, you must prove that an expense is actually tax deductible.
Step One: Incurred And Paid The Expense.
For example, if you claim a $5,000 purchase expense from a cannabis distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a cannabis business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.
Step Two: Deductibility Of The Expense.
Next you must prove that an expense is actually tax deductible. For a cannabis businesses this is challenging because of the I.R.C. §280E limitation; however a cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS.
Appealing An I.R.C. Section 280E IRS Tax Audit
Now if your cannabis IRS tax audit is not resolved, the results may be challenged. After the Revenue Agent has concluded the tax examination, the agent will issue a copy of the examination report explaining the agent’s proposed changes along with notice of your appeals rights. Pay attention to the type of letter that is included as it will dictate the appeals process available to you.
The “30-day letter”
The “30-day letter” gives you the right to challenge the proposed adjustment in the IRS Office Of Appeals. To do this, you need to file a Tax Protest within 30 days of the date of the notice. The Appeals Office is the only level of appeal within the IRS and is separate from and independent of the IRS office taking the action you disagree with. Conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone, or at a personal conference.
The “Notice Of Deficiency”
If the IRS does not adopt your position, it will send a notice proposing a tax adjustment (known as a statutory notice of deficiency). The statutory notice of deficiency gives you the right to challenge the proposed adjustment in the United States Tax Court before paying it. To do this, you need to file a petition within 90 days of the date of the notice (150 days if the notice is addressed to you outside the United States). If you filed your petition on time, the court will eventually schedule your case for trial at the designation place of trial you set forth in your petition. Prior to trial you should have the opportunity to seek a settlement with IRS Area Counsel and in certain cases, such settlement negotiations could be delegated to the IRS Office Of Appeals. If there is still disagreement and the case does go to trial, you will have the opportunity to present your case before a Tax Court judge. The judge after hearing your case and reviewing the record and any post-trial briefs will render a decision in the form of an Opinion. It could take as much as two years after trial before an Opinion issued. If the Opinion is not appealed to a Circuit Court Of Appeals, then the proposed deficiency under the Opinion is final and your account will be sent to IRS Collections.
IRS Area Counsel are experienced trial attorneys working for the IRS whose job is to litigate cases in the U.S. Tax Court and look out for the best interests of the Federal government. So to level the playing field, it would be prudent for a taxpayer to hire qualified tax counsel as soon as possible to seek a mutually acceptable resolution without the need for trial, and if that does not happen, to already have the legal expertise in place to vigorously defend you at trial.
While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering the risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.
December 4, 2019 /0 Comments/in Cannabis Banking, Cannabis Business /by Tax Attorney
On December 3, 2019 Four federal agencies (the Federal Reserve Board, the Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network (FinCEN) and the Office of the Comptroller of the Currency) in conjunction with the state bank regulators announced new policy clarifying the legal status of hemp growth and production and the relevant requirements under the Bank Secrecy Act (BSA) for banks providing services to hemp-related businesses.
Under Federal law (Controlled Substances Act 21 U.S.C. 801) cannabis is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Hemp was included in this class but with the legalization of Hemp in the Agriculture Improvement Act of 2018 (2018 Farm Bill), it was a matter of time before Federal government regulators would catch up.
Changes To Grant Banking Access To Hemp Businesses
The new policy emphasizes that banks are no longer required to file Suspicious Activity Reports (SAR) for customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. For hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants.
This new policy provides banks with background information on the legal status of hemp, the U.S. Department of Agriculture’s (USDA) interim final rule on the production of hemp, and the BSA considerations when providing banking services to hemp-related businesses.
This new policy also indicates that FinCEN will issue additional guidance after further reviewing and evaluating the USDA interim final rule.
The full text of the new policy statement can be read here.
BSA Considerations
Because hemp is no longer a Schedule I controlled substance under the Controlled Substances Act, banks are not required to file an SAR on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. For hemp-related customers, banks are expected to follow standard SAR procedures, and file an SAR if indicia of suspicious activity warrants.
Still, it may be awhile before banks readily open business to hemp as it is generally a bank’s business decision as to the types of permissible services and accounts to offer, and banks must have a BSA/AML compliance program commensurate with the level of complexity and risks involved. When deciding to serve hemp-related businesses, banks must comply with applicable regulatory requirements for customer identification, suspicious activity reporting, currency transaction reporting, and risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers.
While the developments listed above are favorable for hemp-related business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the cannabis industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.
Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Cannabis, including medical cannabis, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.
The BSA enacted in 1970 requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
Cannabis-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.
“Kushy Punch” Looses Its State Cannabis License For Engaging In Illegal Activity
November 26, 2019 /0 Comments/in California Marijuana Licensing, Cannabis Business, cannabis legalization, Newsletter /by Tax Attorney
California law mandates that you can only sell cannabis if you have obtained a license to do so. These licenses being issued by the Bureau of Cannabis Control (“BCC”) which also monitors compliance and will revoke your license if you are non-compliant. If you don’t have a license, then selling cannabis or transporting it in order to sell it is still a crime under H&S Code §11360.
State Of California Revokes Kushy Punch’s State Cannabis License.
The Bureau of Cannabis Control (“BCC”) and California Department of Public Health (“CDPH”) announced on November 21, 2019 that they have revoked the state commercial cannabis licenses issued to Vertical Bliss, Inc., also known as Kushy Punch, located at 20500 Nordhoff Street in Chatsworth, California.
After receiving a complaint about illegal cannabis activity at a location in Canoga Park, California, state regulators searched the unlicensed location and seized nearly $21 million in illegal cannabis products, including 7,200 illegal vape cartridges. The license for the Nordhoff Street premises was revoked following the discovery of connections between Vertical Bliss and the unlicensed location. The revocations of Vertical Bliss’ cannabis manufacturing license CDPH-10003574 and cannabis distribution license C11-0000544-LIC are effective November 21, 2019.
All commercial cannabis activity in California must be conducted on a premises with a valid license issued by the appropriate state cannabis licensing authority. Manufacturing, distributing or selling cannabis goods without a state license or at a location that is not licensed is a violation of state law.
Click here on a raid the occurred in Riverside County.
Click here on a raid that occurred in Kern County.
Click here on a raid that occurred in the City of Santa Rosa in Sonoma County.
Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.
November 20, 2019 /0 Comments/in Cannabis Banking, Cannabis Business, cannabis legalization /by Tax Attorney
Marijuana Opportunity Reinvestment and Expungement (MORE) Act Approved By The House Judiciary Committee On November 20, 2019
The MORE Act (H.R. 3884), sponsored by House Judiciary Committee Chairman Jerrold Nadler (D-New York), would remove cannabis from the Controlled Substances Act (CSA) and set aside funding to begin repairing the damage of the war on drugs, which has been disproportionately waged against communities of color. Among other things, the MORE Act would also provide for resentencing and expungement of records for people previously convicted of cannabis offenses and would shield immigrants from being denied citizenship status over marijuana.
Chairman Nadler issued a press release stating “Our marijuana laws disproportionately harm individuals and communities of color, leading to convictions that damage job prospects, access to housing, and the ability to vote. Recognizing this, many states have legalized marijuana. It’s now time for us to remove the criminal prohibitions against marijuana at the federal level. That’s why I introduced the MORE Act, legislation which would assist communities disproportionately impacted by the enforcement of these laws. I am grateful for the leadership of Rep. Barbara Lee and Rep. Blumenauer, as well as other Members of Congress who have helped pave the way for this important measure. I look forward to moving this legislation out of the House Judiciary Committee, making it one step closer to becoming law.”
The House Judiciary Committee approved the MORE Act on a bipartisan vote of 24-10. This marks the first time that a congressional committee has ever passed a bill to remove marijuana from the Controlled Substances Act. The bill still must go to a vote to the full floor of the House before moving on to the Senate.
Keep in mind that a change in the tax law could result only in prospective relief and have no impact on prior tax years.
November 18, 2019 /0 Comments/in Cannabis Business, cannabis legalization, Criminal Tax Enforcement /by Tax Attorney
Riverside County Sheriff’s Office Raids Illegal Cannabis Grow Operation.
As reported by the Riverside County Sheriff’s Office, authorities received complaints regarding possible illegal marijuana cultivation occurring within the La Cresta community, Riverside County.
On November 14, 2019, deputies served a search warrant in the 39000 block of Calle De Campareno. Approximately 1700 marijuana plants in various stages of growth were located and collected. In addition, the electrical system within the residence was illegally altered causing a severe fire hazard and theft of utilities. The estimated theft of utilities for the last six months is going to be up words of approximately $60,000. The entire residence was turned into an illegal marijuana cultivation.
While making announcements regarding the service of a search warrant, two female individuals fled out the rear of the residence and were detained. They were subsequently arrested for maintaining a drug house, illegal marijuana cultivation, and theft of utilities.
Meiyun Zhou, 38-year-old female resident of La Cresta, was arrested and booked into Cois Byrd Detention Center in Murrieta.
Xiao Mei Chen, 22-year-old female resident of Corona, was arrested and booked into Cois Byrd Detention Center in Murrieta.
Click here on a raid that occurred in Kern County
Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.
November 7, 2019 /0 Comments/in Cannabis Business, Marijuana Tax Planning & Marijuana Tax Defense, Newsletter /by Tax Attorney
I.R.C. § 280E disallows all trade or business expense deductions for a cannabis business even though the cannabis business operates legally under state law. As more “280E Tax Audits” make their way up to the U.S. Tax Court, various creative arguments have been made challenging the constitutionality and legality of § 280E. A recent such case where the U.S. Tax Court issued an opinion is Northern California Small Business Assistants Inc. v. Comm’r, 153 T.C. No. 4 (2019).
Northern California Small Business Assistants Inc.
Northern California Small Business Assistants Inc. (“NCSBA”) is a California medical marijuana dispensary that was selected for audit for the 2012 tax year. The IRS agent in carrying out the mandate of § 280E determined a deficiency of over $1.2 million and applied an accuracy-related penalty of $252,842.
NCSBA petitioned the Tax Court, contending that its operations are legal under California law and presenting three novel arguments. First, NCSBA argued that Code Sec. 280E imposes a gross receipts tax as a penalty in violation of the Eighth Amendment. Second, NCSBA argued that the text of § 280E tracks that of § 162, which allows for all ordinary and necessary business expense deductions, suggesting that § 280E limits only § 162 deductions and permits others – specifically, taxes under § 164 and depreciation under § 167. Finally, NCSBA argued that § 280E refers to “trafficking” and therefore does not apply to marijuana businesses operating legally under state law.
The Tax Court rejected all of NCSBA’s arguments. With respect to NCSBA’s Eighth Amendment argument, the Tax Court ruled that, unlike in other contexts where a financial burden was found to be a penalty, disallowing a deduction from gross income is not a punishment. In the court’s view, § 280E was enacted under Congress’s clear authority to tax gross income and is directed at persons who operate a business in violation of state or federal law.
Next, the Tax Court found that § 280E is not limited to trade or business deductions because the plain language of § 280E states that “no deduction or credit shall be allowed” to businesses that traffic in controlled substances. The court noted that § 261 provides that “no deduction” is allowed for items specified in part IX of subchapter B, and § 280E is in part IX. Similarly, § 161 provides that the deductions in part VI of subchapter B, including the deductions in § 164 and § 167, are allowed subject to the exceptions in part IX. Thus, the court found that, clearly, § 164 and § 167 are limited by the exceptions in part IX, including § 280E.
Finally, the Tax Court rejected NCSBA’s argument that the word “trafficking” in § 280E implied that the statute does not apply to a business operating legally under state law. The court noted that it has rejected that argument in several previous cases and that NCSBA offered no compelling reason to overrule those decisions. The court concluded that its precedent is unambiguous and that Congress, not the courts, would need to carve out an exception in § 280E for businesses that operate legally under state law.
The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law and other states that have legalized cannabis, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back though has no impact on the IRS which will likely start in 2019 to more aggressively target cannabis businesses with audits.
Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay
Generally, businesses can deduct ordinary and necessary business expenses under §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added § 280E. Under § 280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.
This risk should be risk posing the greatest challenge to any cannabis business as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.
November 4, 2019 /0 Comments/in Cannabis Business, Marijuana Tax Planning & Marijuana Tax Defense /by Tax Attorney
Kern County Sheriff’s Office Raids Illegal Cannabis Operation In Arvin
As reported by the Kern County Sheriff’s Office received information about several hemp cultivation sites that were actively cultivating cannabis. The Kern County Sheriff’s Office, with the assistance of California Department of Fish and Wildlife (CDFW), and Federal Bureau of Investigation (FBI), initiated a joint investigation.
On October 25, 2019, a search warrant was executed at eleven different fields in the Arvin area, amounting to over 459 acres of land. Investigators with the Kern County Sheriff’s Office Narcotics units seized and eradicated approximately 10 million marijuana plants. These plants have an estimated value of over $1 billion on the black market.
These illicit marijuana gardens were grown under the guise of legitimate hemp production. The Food and Agricultural Code and Health and Safety Code define industrial hemp has containing less than 0.3% THC content. The research exemption allows for cultivators to grow and possess hemp/cannabis that is over 0.3% THC content, “if that cultivation or possession contributes to the development of types of industrial hemp that will comply with the three-tenths of 1 percent THC limit established in this division.” This provision does not allow the commercial sale of hemp or cannabis that is over this threshold.
Preliminary testing showed the levels of THC in these fields were well over the legal limit for industrial hemp production and were in fact cannabis. The investigation is ongoing.
October 22, 2019 /0 Comments/in Audits, Cannabis Business /by Tax Attorney
We previously reported in our blog that the Trump Administration organized a committee of federal agencies from across the government to combat public support for marijuana and cast state legalization measures in a negative light while attempting to portray the drug as a national threat.
The IRS appears to be following the agenda of the Trump Administration when it comes to Cannabis and has formed special audit groups that are tasked with conducting cannabis tax audits on medical and recreational cannabis businesses. Our office is currently representing cannabis businesses under audit and in U.S. Tax Court and we have learned from IRS agents that they have been given a mandate to audit just about every licensed cannabis operator in their districts.
The IRS recognizes that cannabis businesses deal in cash which makes it harder to substantiate deductions and that the Internal Revenue Code prohibits cannabis businesses from deducting operating expenses. These two factors could lead to an avalanche of audits that could cost cannabis businesses millions in unpaid taxes and penalties.
I.R.C. §280E
The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.
Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Cannabis, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.
IRS Guidance On Cannabis.
The IRS issued a memo to provide guidance to its agents on conducting audits of cannabis businesses addressing whether an IRS agent can require a taxpayer trafficking in a Schedule 1 controlled substance to change its tax accounting to conform to I.R.C. §280E.
Not surprisingly that the IRS ruled that IRS agents have the authority to change a cannabis business’ method of accounting so that pursuant to I.R.C. §280E costs which should not be included in inventory are not included in Costs Of Goods Sold (“COGS”) and remain non-deductible for income tax purposes.
Cannabis Tax Audits & Litigation.
It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits under an “audit technique guide” that has been developed by IRS officials using information from Colorado’s seed-to-sale tracking system. This guide is now being used nationwide with IRC §280E being at the forefront of all IRS cannabis tax audits.
Next you must prove that an expense is actually tax deductible. For a cannabis businesses this is challenging because of the I.R.C. §280E limitation. Recall that under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.
A cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS. Working with a cannabis tax attorney can ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses resulting in the lowest possible income tax liability.
In addition to IRS audits, state cannabis audits are also complex and thorough and generally include all taxes specific and nonspecific to the cannabis business. Potentially at risk is the cannabis license that enables the business to operate. State audits will focus on records regarding sales and use tax, excise taxes, and seed-to-sale tracking records.
Now if your cannabis IRS tax audit is not resolved, the results may be challenged and litigated in the U.S. Tax Court or Federal District Court. The U.S. Tax Court has jurisdiction to hear disputes over federal income taxes before final assessment and collections while the Federal District Court generally requires taxpayers to first pay the liability then seek repayment through a refund request.
Considering the tax risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. And if you are involved in crypto currency, check out what a Bitcoin Attorney can do for you.
October 3, 2019 /0 Comments/in Cannabis Business, cannabis legalization, Newsletter /by Tax Attorney
In an article published July 22, 2019 in High Times, it is reported that an Orlando, Florida cannabis church known as “Reflections Ministry” is producing a new cannabis-inspired multi-sensory experience blending music, light, live performers, and theatrical effects with a spiritual message about overcoming life’s obstacles. The production, titled “The Reflections Show,” was created by cannabis advocate and technology artist Joseph Andrew.
The article goes on to report that Mr. Andrew already has ideas for the expansion of the Reflections Ministry and is seeking sponsors and investors to help fuel its growth. Plans for the future include the construction of a cafe featuring plant-based comfort foods from Jaya Bressack. The venue will also be available to rent for seminars, weddings, video production, and other private events.
With entrepreneurs taking advantage of state legalization of cannabis, we are seeing more innovative approaches to adding cannabis consumption into entertainment and dining venues. But despite these innovations, cannabis still remains illegal under Federal law.
Risks Of Running A Cannabis Business
Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.
Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government. While cannabis is legal in California, that is not enough to protect you. It’s coming down that the biggest risk is TAXES. Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Metropolitan Los Angeles and other California locations protect you and maximize your net profits. If you are involved in crypto currency, check out how a bitcoin tax attorney can help you.
September 27, 2019 /0 Comments/in Cannabis Banking, Cannabis Business, cannabis legalization, Newsletter /by Tax Attorney