Cannabis businesses face a challenging and complicated tax regime. Unlike typical businesses, a cannabis business faces unique state taxes, frequent and complex tax audits, and Internal Revenue Code Section 280E. The tax compliance burden to operate a successful cannabis business is enormous and can be overwhelming – one wrong mistake may result in serious consequences.
Cannabis Tax Compliance
Cannabis Tax Compliance requires a detailed and daily compliance plan managed and maintained by experienced professionals backed up diligent and accurate record keeping. Failure to maintain compliance and records can result in serious tax and licensing consequences. Depending on the company, cannabis businesses may be required to file in excess of 50 tax returns per year. Failures to comply, underreporting, or filing late, may result in a landslide of penalties and interest.
Our cannabis tax attorneys bring years of mainstream tax experience to help our cannabis clients achieve and maintain compliance and protect their businesses. In this new and emerging industry, it is important that business owners receive guidance from real tax attorneys with specialized knowledge in the cannabis industry. Our Denver tax attorneys use their experience and knowledge to advise cannabis businesses on ever-changing regulatory requirements and help resolve issues before they become problems. For Cannabis Businesses with outstanding taxes, we will work with the IRS and local taxing authorities to secure a resolution to ensure your cannabis business remains operational and you do not lose your license.
Internal Revenue Code § 280E
While cannabis businesses are legal in many states they remain illegal under Federal Law. Illegal income must be reported, it is taxable, and the IRS is determined to enforce the tax code against cannabis businesses. In fact, cannabis businesses are scrutinized at a higher level by the IRS, the risks are amplified, and they are subject to I.R.C. § 280E. Section 280E disallows deductions for businesses trafficking in Schedule 1 or 2 controlled substances. Enforcement of Section 280E can cause a very unfavorable tax bill.
Our cannabis tax attorneys understand the complexity of Section 280E. We regularly advise business owners on the vast reach of Section 280E and the exposure they have for the “280E tax”. We represent cannabis business under audit and protect their entitlement to the tax benefits (where possible) other businesses enjoy. When necessary, we fight the improper overreach of the federal government through the United States Tax Court and Federal District Courts. Consult with one of our competent cannabis tax attorneys and understand the difference between ‘deductible’ Cost of Goods Sold (COGS) and non-deductible ordinary business expenses. While Section 280E is a very difficult expense for cannabis businesses, the expense can be managed through knowledge and proactive solutions. Whether looking to protect a business from a future 280E determination, or in need of protection for an audit, trial or collection matter that has already begun, we can help.
Cannabis Tax State & Local Audits
Cannabis businesses face frequent Federal tax audits. Do not be surprised; be prepared and contact one of our cannabis tax attorneys. The IRS has formed special audit groups that are tasked with conducting cannabis tax audits on medical and recreational cannabis businesses. Section 280E is at the forefront of all IRS cannabis tax audits and enforcement of 280E could result in unbearable tax liabilities. Working with one of our cannabis tax attorneys will allow you to protect yourself, as well as ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses.
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. Our cannabis tax attorneys will work with you to ensure that the audit is fairly conducted and a fair result is achieved.
Cannabis Tax Litigation
If your cannabis tax audit is not resolved, the results may be challenged and litigated (depending on the type of tax) in the U.S. Tax Court, Federal District Court, or State Court. The U.S. Tax Court has jurisdiction to hear disputes over federal income taxes before final assessment and collections while the federal district courts generally require taxpayers to first pay the liability then seek repayment through a refund request.
If you have received a Notice of Deficiency you have the opportunity to challenge the audit result court. The Notice will give you 90 days to file petitioner in U.S. Tax Court or, for the State, 30 days to file a protest. Our cannabis tax attorneys, led by an IRS Trial Attorney, will challenge the audit determination in the correct court, protect your rights, and work with you to navigate the intricacies of the tax system to achieve the best results possible.