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financial horrors to avoid for your Marijuana Business
The 280E makes it very difficult for the business owner during tax time. One of the highlights from the Holland & Knight’s article is that the “Section 280E of the Internal Revenue Code (Code) prohibits the deduction of business expenses when the trade or business consists of trafficking in controlled substances”. Your normal business expenses for the cannabis industry are now disallowed with the exception of cost of goods sold (COGS). You must be very careful when calculating your COGS. Basically, that is all you got to work with. However, you don’t want to make an error, as criminal charges can be attached to an audit involving marijuana. The basic rule is to keep it as simple as possible. Be very careful when structuring multiple businesses in vertical or horizontal integration. If it seems as though you are only creating the business to shift a deduction, you may want to reconsider that plan. Everyone’s business situation is unique and general advice should never be a deciding factor when making decisions for your cannabis business.
The 280E was first originally designed to not allow people with illegal businesses to have the same deductions as legal businesses. However, the state legal cannabis industry falls under its rule. This rule basically strips away expenses and leaves you with the COGS as your only expense. This leaves the business owner paying anywhere from 40-80% rate on income taxes. With the increase in cannabis business over time, the IRS is experiencing more opportunities to conduct an audit. There are not as many cases established to have a reference to, so the IRS agent has a direct influence on the rule’s interpretation. If that doesn't give you goosebumps, you will not be scared this ghostly season. One way to keep yourself out of this witch’s brew is to hire a professional that has experience and knowledge of the 280E reporting and cost accounting. Yes, you can do it yourself, however I would not recommend it unless you truly studied up on the rules and had a clear understanding of its interpretation and application to your operations.
BY HIGHER ACCOUNTING
IRS AUDITS AND THE 280E, A WITCH’S BREW.
Compliance nightmares… Keeping your license valid is your number one priority. Without that you are not legal and could come with some scary consequences. Without an active license, you can not possess large amounts of cannabis. Not having an active license, you will put your inventory at risk of being confiscated by regulating agencies (such as the Bureau of Narcotics) and the possibility of jail time. Do everything that you can possibly do to stay compliant and considered a state legal cannabis business. Compliance is the foundation in which your business is built from, keep it strong. Plan ahead and start collecting your documents months prior to expiration, starting with the one that took you the longest to get and ending with the quickest. Make sure all licenses that follow are tracked and maintained properly. Everything after that is hot apple cider! Some fines that can be assessed are $5000 and more! Not to even think about the criminal charges that may be applied. Compliance is critical to your business operations and should be taken seriously. Your Cities and Counties mainly determine the compliance rules for your business’s zoning and permitting. Maintain your operations and stay compliant. It takes a little extra effort but is well worth its rewards. Stay up to date on current regulatory changes. Those changes could apply to you! It is your responsibility to be informed. You could be missing out on opportunities or be out of compliance. When not planning gets Spooky…No emergency fund
62 OCTOBER 2021 | CHRONIC
This October, are there cobwebs in your savings jar? Save first, then spend. Sounds simple, but most businesses don’t put away money for emergencies. Putting money aside while things are running well is critical to future operations. Some of us already use a savings account to put aside money for tax time, but it should hold more than just tax liability.
