THC Legal Group works with businesses in the cannabis industry to fortify their Cannabis brand and protect their holdings. Below is a guest post by Abe Cohn, COO of THC Legal Group, on how to deal with marijuana business and the IRS.
Cannabis Businesses: How to Make Sure You Don’t Get Audited
With States increasingly developing Cannabis legalization programs (either medical or recreational), there is now a host of technical and legal challenges marijuana businesses must stay apprised of to satisfy various IRS regulations and requirements. Principally, the cannabis industry is held to a different set of tax standards than ordinary businesses and therefore, it is essential for cannabis business owners to develop financial habits and strategies to avoid an audit. If marijuana businesses do find themselves in the targeted crosshairs of an IRS audit, learning how to manage the legal implications of the audit is critical.
Solid Bookkeeping May prove to be Your Greatest Asset
While the IRS ordinarily commences an audit by examining the given company’s bank statement(s), the IRS is often incapable of performing this routine check with marijuana businesses because most cannabis businesses don’t have bank accounts (many banks still refuse to open accounts for cannabis companies). Consequently, IRS agents will expect the audited company to provide robust and comprehensive documentation for all transactions that are being claimed for business deductions. Yes, it is annoying and time consuming but if you want to make the agent’s life easier (and as a corollary, your own life easier), keep pristine records of all of your purchases and expenses. It’s worth it to know how to deal with marijuana business and the IRS.
Certain Business Expenses Cannot be Deducted
Generally, companies may deduct expenses that arise under the normal course of doing business (phone bills, travel, electronics etc.). However, because Cannabis is still a Schedule 1 Drug under the Controlled Substance Act, marijuana companies are precluded from claiming these deductions under the ever-frustrating IRC 280E. 280E simply says that companies may not claim deductions if the company is trading or trafficking in substances identified by the Controlled Substance Act. Therefore, it is important to consult with a specialized cannabis accountant who is familiar with the scope of this preclusion and see how your particular business is implicated. If you do not manage your expenses and indeed expectations with this initial understanding, you may find yourself owing a huge amount of tax to the government.
A Quick Lesson from Case Law
One of the more interesting nuances to IRC 280 and its potential exemptions arose in the seminal CHAMP case. Fundamentally, the Court ruled that companies that diversify their services to also include non-cannabis services may claim certain deductions that would have others-wise been disallowed. So, if your company were to use a part of your facility to provide a good or service that does not touch the plant, you may be able to claim deductions for those specific expenses. The legal strength of this theory is far from certain though and in subsequent cases, the Court has looked unfavorably on this perceived strategy to beat 280E. See Olive.
You Got Audited! Know Your Rights
Due Process ensures your right to fair representation and if you are not qualified to explain your tax returns to an IRS agent, it would be wise to hire a competent tax professional to advise you on how to deal with marijuana business and the IRS. There may very well be certain deductions that cannot be written off under 280E, but be wary of an IRS attempt to disallow all expenses, including ones that do not fall under 280E.
Typically, IRS attorneys will want to resolve the case without going to court and are amenable to negotiating an out of court settlement. We can’t overstate the importance of how to deal with marijuana business and the IRS. Your job is to provide any and all information (proof of expenses or otherwise) that can meaningfully make the case for greater deductions. For instance, under 280E, you cannot deduct wages that you pay to your retail employees. However, if you can demonstrate that your retail associate is a registered nurse or medical student and that you are taking a consultation-related employee expense, it may become an allowable expense. Clearly, this is a case-by-case analysis that will yield different results for each individual business. Ultimately, your objective should be to maximize your allowable deductions while appreciating the legal precariousness of the cannabis industry and all of the financial uncertainty that comes with it.
Abe Cohn is COO of THC Legal Group, a team of Marijuana Lawyers specializing in providing legal protection for businesses in the marijuana industry. For more information, please visit their website at http://www.THCLegalGroup.com