federal cannabis legalization bill

New Congressional Cannabis Caucus Co-Chairs Announced

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The departure of Representatives Jared Polis and Dana Rohrabacher from Congress left vacant two seats on the bipartisan Congressional Cannabis Caucus (the “Caucus”) so on January 9, 2019, the new leadership team of the Congressional Cannabis Caucus was announced, with Representatives Barbara Lee (D-CA) and David Joyce (R-OH) joining founding members Earl Blumenauer (D-OR) and Don Young (R-AK).

The Caucus was first established in 2017to help shape the marijuana reform agenda in the House and build bipartisan support for legislation that would address issues facing the marijuana industry such as banking, taxation, de-criminalization, medical research and veterans’ healthcare.

The comments of three of the members of the Caucus on the work they hope the Caucus will accomplish, from addressing the racial injustices of the drug war to implementing commonsense policies to support medical research into marijuana were made in various press releases.

Representative Earl Blumenauer’s Press Release Statement

Representative Barbara Lee’s Press Release Statement

Representative Don Young’s Press Release Statement

Rep. Blumenauer stated:

“The Cannabis Caucus was the first of its kind to create a forum for elected officials to collaborate on ways to address our outdated federal marijuana laws.  Congress is clearly out of step with the American people on cannabis when national support for federal marijuana legalization is at an all-time high and we saw several states move toward with legalization last November.”

The addition of Rep. Lee adds diversity to the Caucus’s leadership as she will become the first woman and first African-American to serve as co-chair. Rep. Lee is no stranger to cannabis activism as she introduced the Marijuana Justice Act in the last Congress which received the highest number of co-sponsorships of any legislation that would remove marijuana from the Federal Controlled Substances Act in history.

Rep. Lee stated:

“For far too long, communities of color and women have been left out of the conversation on cannabis. I am committed to ensuring that marijuana reform goes hand-in-hand with criminal justice reform so we can repair some of the harm of the failed War on Drugs. We must also work to build an industry that is equitable and inclusive of the communities most impacted by cannabis prohibition,” said Rep. Lee.

Rep. Young stated:

“Since the initial launch of the Congressional Cannabis Caucus we’ve seen an exponential growth in interest, legislation, and membership many would not have expected.The idea of States’ Rights has been a central tenet of this movement and one that I believe will ultimately carry the day. I encourage all Members to join us in this debate and explore the varying issues.”

It is noteworthy that Rep. Joyce becomes the first leader in the Caucus to come from a state (Ohio) that has yet to pass an adult-use regulatory program. He nevertheless has been a long-time supporter of reform efforts introducing The States Act (legislation that would ease the tension between federal prohibition and state-legal cannabis programs), as well as was a cosponsor of the Ending Federal Marijuana Prohibition Act (legislation which would remove cannabis from the Controlled Substance Act entirely).

The Federal Controlled Substances Act

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 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. 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.

What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist.  Considering this 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.

Warning For U.S. Taxpayers With Interests In Foreign Corporations – You May Be Writing A Check To IRS.

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Warning For U.S. Taxpayers With Interests In Foreign Corporations – You May Be Writing A Check To IRS.

If you own an interest in a foreign corporation, you may be required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. It is one of the most complex reporting obligations in the U.S. offshore information tax reporting regime and for U.S. taxpayers not complying could lead to rather large penalties. A taxpayer who fails to file a “substantially complete” Form 5471, absent reasonable cause, is subject to severe monetary and other penalties, beginning at $10,000 per year per missed form.

It does not matter where you live, if you are a U.S. person with an ownership interest of at least 10% in a foreign corporation, the IRS wants to know about it and you must file Form 5471. Even if you live abroad and qualify for the Foreign Earned Income Exclusion, you must still file Form 5471.

Additionally, the statute of limitations remains open for failure to file a Form 5471 on the taxpayer’s entire income tax return until the IRS receives a substantially complete filing. This subjects your income tax return to a longer period of audit scrutiny.

The IRS utilizes Form 5471 to have a complete transparency of what U.S. persons own interests in foreign corporations. It is merely an informational return and has nothing to do with the computation of any tax. This is similar in purpose to FBAR’s which is a separate informational return filing that taxpayers with foreign bank accounts are required to file on an annual basis.

Who Has to File?

If you are a U.S. person who is an officer, director, or shareholder in a foreign corporation (that is a legal entity formed under the laws of a country other than the United States) you need to comply with the requirement to file Form 5471.

There are four active filing categories with different filing requirements for those who meet each separate category description. If you meet more than one category description, you can file once but must include all of the information required for both categories.

For the majority of the categories, a U.S. person is defined as any of the following: a U.S. citizen or resident, a domestic U.S. partnership, a domestic U.S. corporation, or a domestic estate or trust.

The categories are as follows:

Category 2: This category applies in the year when a U.S. person acquires 10% or more of the stock in a foreign corporation as an officer or director.

Category 3: This category applies to any U.S. person who adds to their stock in a company, thereby surpassing the 10% minimum ownership, or any U.S. person who sells their stock in a company so that they own less than 10%.

Category 4: This category applies to any U.S. person who owns more than 50% of the stock of a foreign corporation.

Category 5: This category applies to any U.S. person who owns at least 10% of a “controlled foreign corporation” or CFC.

No matter which category you may fall in, the penalties for not filing Form 5471 would be the same.

Penalties

The penalty for not filing Form 5471 (or doing so incorrectly) is $10,000 for each tax year. An additional $10,000 will be charged if the information is not provided within 90 days after the IRS has mailed a notice of failure to the U.S. person. After that, an additional $10,000 penalty will be applied each 30-day period until the information is filed. The maximum penalty is limited to $50,000 for each failure but considering that multiple years of non-compliance may be involved, you can see how this amount can grow even bigger.

Keep in mind that the foreign corporation does not have to have any profits for the penalties to apply. This is a penalty for a failure to file an informational report, not a tax that results from the information provided on the form.

It is possible to get these penalties abated due to “reasonable cause” which is why the hiring of qualified tax counsel is essential to pursue such a result and to make sure that your Form 5471 filings are acceptable to the IRS.

When to File

Form 5471 should be attached to your income tax return if filing as an individual, or with your corporate tax return if filing as a corporation.

The corresponding due dates of each type of filing apply as well. For example, Form 5471 is due by March 15th if filed by a corporation. If filed by an individual, it would be due April 15th, or June 15th if you are an expat. Now if any income tax return is put on extension, the due date for the Form 5471 also follows the extended filing deadline of the underlying income tax return.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Metropolitan Los Angeles (Long Beach) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.

How The Federal Government’s Shutdown Is Creating Opportunity For Taxpayers With IRS Debt.

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How The Federal Government’s Shutdown Is Creating Opportunity For Taxpayers With IRS Debt.

At midnight on December 21, 2018, funding for Federal government agencies lapsed triggering a partial shutdown of the federal government. The date when funding will be restored by Congress has not been established but under plans established by each Federal agency, as the lapse in funding continues more Federal government functions will be shutdown.

The Anti-Deficiency Act.

Overriding each Federal agency’s plan is the Anti-Deficiency Act, 31 U.S.C. §1341, which provides that in the absence of appropriated funds no obligation can be incurred except for the protection of life and property, the orderly suspension of operations, or as otherwise authorized by law. This means that absent an appropriation, many Federal employees are prohibited from working, even on a volunteer basis, “except for emergencies involving the safety of human life or the protection of property”. 31 U.S.C. §1342. Accordingly, each Federal agency must designate those employees whose work is necessary to sustain legal operations essential to the safety of human life and the protection of property.

Department Of Justice’s Contingency Plan.

The Department of Justice has issued guidance, which gives priority to continuing work on criminal cases. Consequently, no employees in the Tax Division of the Department Of Justice will be authorized to work on CIVIL MATTERS during a lapse in appropriations.

Internal Revenue Service’s Contingency Plan.

The IRS being an agency under the Department Of Treasury in late November issued a fiscal year 2019 “Lapsed Appropriations Contingency Plan” that governs what will happen at the IRS during a government shutdown — but only through December 31. With the government shutdown now continuing into 2019, a new plan will have to be formulated.

The initial plan covered only a five-day shutdown. Now that the shutdown is lasting longer than five business days and as of the writing of this blog no quick resolution appears in sight, the IRS will have to reassess ongoing activities and identify necessary adjustments of excepted positions and personnel.

The initial plan anticipated that preparation for the 2019 filing season will not be affected by the shutdown.

The initial plan also identified 9,946 IRS employees as “excepted/exempt” employees who would not be furloughed. The rest of the IRS’s 79,868 employees (as of November 10, 2018) would be furloughed, meaning they will be put on leave of absence without pay, under 5 C.F.R. Section 752.402.

The initial plan identified the following activities of IRS that will continue which are necessary for safety of human life or protection of government property:

  • Continuing to complete and test upcoming filing year programs
  • Processing electronic returns, up to the point of refund
  • Processing paper tax returns through “batching”
  • Processing remittances; and
  • Maintaining criminal law enforcement operations.

When funds are appropriated to the IRS, furloughed employees will return to work (they are expected to return within four hours after the reactivation is announced if it occurs on a scheduled work day).

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because the IRS is not fully operational. Instead you should be utilizing this valuable time to get yourself prepared so that when IRS re-opens for business, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS. Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2019, taxpayers who expect to owe for 2018 should have their 2018 income tax returns done now so that the 2018 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2019.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.

overpay tax

Attention Crypto Currency Investors: Don’t Pay More In Taxes Than What You Have To!

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Attention Crypto Currency Investors: Don’t Pay More In Taxes Than What You Have To!

During the last two months of 2018 Bitcoin was in its last bull run of the year that would result in a record high of $19,511 just before Christmas but at the close of 2018 was worth $3,743. If you bought Bitcoin and other crypto currencies when their prices were high, Uncle Sam has a present for you that could lower your taxes by allowing you to claim your losses.

This is due to Notice 2014-21 issued by the Internal Revenue Service (IRS) which treats cryptocurrencies as an investment property, rather than a currency. Thus, whenever you trade cryptocurrency, the transaction is either a capital gain (where you make money) or a capital loss (where you lose money); and any losses this year could ultimately result in a smaller tax bill. Where your capital losses exceed your capital gains, you are still allowed to deduct up to $3,000 in capital losses. Losses beyond that amount get carried over to the next year to offset capital gains before applying another $3,000 excess loss application to your other income.

For example, assume a taxpayer bought $5,000 worth of BTC in 2018. After turning that into $10,000 through trading, he later lost cash due to a dip in the markets and took a big hit, losing $9,000. So he cashed out, walking away with just $1,000. Under this scenario he lost $4,000 in 2018 of which $3,000 he can still deduct in 2018 and the other $1,000 of loss gets carried forward to 2019.

Taxation of Crypto Currency.

Notice 2014-21 provides these tax rules:

  • Trading cryptocurrencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
  • Exchanging one token for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
  • Receiving payments in crypto in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
  • Spending crypto is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $500. If that coin was then worth $700 and you bought a $700 gift card, there is a $200 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
  • Converting a cryptocurrency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
  • Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain.
  • Mining coins is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
  • Initial coin offerings do not fall under the IRS’s tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.

Penalties For Filing A False Income Tax Return Or Under-reporting Income.

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment

The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.

What Should You Do?

With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the Bitcoin tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Also, if you are involved in cannabis, check out how our cannabis tax attorneys can help you.

2019 tax return filing deadline

Getting Ready For The 2019 Tax Filing Season

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Getting Ready For The 2019 Tax Filing Season

On January 7, 2019, the Internal Revenue Service (IRS) announced that it will process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled despite the current government shutdown.

While full operation of the IRS cannot resume without appropriation of funds by Congress, Federal law (31 U.S.C. 1324) mandates that all tax refunds still due to taxpayers must be made through a permanent, indefinite appropriation. Thus while a significant number of IRS employees are furloughed and IRS functions severely limited under the current shutdown, taxpayers will still get their refunds.

The IRS will be recalling a significant portion of its workforce, currently furloughed as part of the government shutdown, to work. Additional details for the 2019 filing season will be included in an updated 2019 Lapsed Appropriations Contingency Plan to be released publicly in the coming days.

April 15th Filing Deadline.

The filing deadline to submit 2018 tax returns is Monday, April 15, 2019 for most taxpayers. Because of the Patriots’ Day holiday on April 15 in Maine and Massachusetts and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17, 2019 to file their returns but for everyone else, the filing deadline remains as Monday, April 15.

Since the IRS will begin processing tax returns on January 28th there is no advantage to filing tax returns on paper in early January instead of waiting for the IRS to begin accepting e-filed returns.  Nevertheless, it makes sense to start organizing your information early and so when the IRS filing systems open on January 28th, you are ready to submit your tax return right away.

Refunds in 2019.

Choosing e-file and direct deposit for refunds remains the fastest way to file an accurate income tax return and receive a refund.  The IRS still anticipates issuing at least 90%of tax refunds in less than 21 days, but there are some important factors to keep in mind for taxpayers that could cause delay.  Under the Protecting Americans from Tax Hikes (PATH) Act which took into effect starting with the 2017 Tax Filing Season, the IRS is required to hold refunds for tax returns which include a claim of the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15, 2019. Also consider that it would still take several days for these refunds to be released and processed through financial institutions, and factoring in weekends, the current government shutdown and the President’s Day holiday, taxpayers claiming these credits may not have actual access to their refunds until the later part of February.

The status of your tax refund can be checked directly with IRS by using the Where’s My Refund? ‎on IRS.gov and the IRS2Go phone app.

Time Limits For Keeping Your Tax Records

Even though your 2018 income tax return is processed by the IRS and a refund is issued, that does not mean the IRS can later question or audit the tax return,  In fact the Statute Of Limitations allows the IRS three years to go back and audit your tax return.  That is why it’s a good idea to keep copies of your prior-year tax returns and supporting backup documentation for at least three years.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.

2019 Mileage Rates IRS

New Mileage Rates Announced By IRS for 2019

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New Mileage Rates Announced By IRS for 2019

Before the 2017 Tax Cuts And Jobs Act was enacted into law, many taxpayers relied on the IRS’ annual publication of the mileage rates to be used for business travel. For many taxpayers this was a significant tax deduction but the 2017 Tax Cuts And Jobs Act changes that.

Why fewer taxpayers will be itemizing:

Increase Of Standard Deduction – A substantial increase to $12,000 for single filers (was $6,500), $18,000 for heads of household (was $9,550), and $24,000 for joint filers (was $13,000).

Limit On Deduction For State And Local Taxes – A taxpayer may claim an itemized deduction of only up to $10,000 ($5,000 for a married taxpayer filing a separate return) in (i) personal state and local property taxes, and (ii) state and local income taxes (or sales taxes in lieu of income taxes).  Taxes paid or accrued in carrying on a trade or business are not subject to this limitation.

Limit On Deduction Of Mortgage Interest – For mortgages incurred after December 31, 2017, taxpayers may deduct interest on up to $750,000 of principal (mortgages existing before January 1, 2018 are still subject to the pre-existing law’s $1 million limit). But for all taxpayers there is no longer a deduction for interest paid on home equity loans.

Elimination Of Miscellaneous Itemized Deductions And Deduction For Moving Expenses – A taxpayer can no longer deduct miscellaneous itemized deductions which include unreimbursed employee expenses and tax preparation costs.  Also the deduction for moving expenses is gone.

But for those who can benefit from deducting costs of operating an automobile for business, charitable, medical or moving purposes, here are the rates for 2018:

Standard Business Mileage – The standard business mileage rate increased by 3.5 cents to 58 cents per mile.

Medical And Moving Mileage – The medical and moving mileage rates also increased by 2 cents to 20 cents per mile.

Charitable Mileage – Charitable mileage rates remained unchanged at 14 cents per mile.

Time Limits For Keeping Your Tax Records

Even though your 2018 income tax return is processed by the IRS and a refund is issued, that does not mean the IRS can later question or audit the tax return,  In fact the Statute Of Limitations allows the IRS three years to go back and audit your tax return.  That is why it’s a good idea to keep copies of your prior-year tax returns and supporting backup documentation for at least three years. In the case of backing of any deductible mileage, you will need to retain your travel log showing the distance traveled, who you visited and the purpose of the visit.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Metropolitan Los Angeles (Long Beach) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.

medical marijuana cannabis

Can Cannabis Help People With Alcohol-Induced Pancreatitis?

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Pancreatitis is an increasingly common clinical condition that causes significant morbidity and mortality.

The pancreas is an organ/gland that is adjacent to the small intestine and behind the stomach. The pancreas has two major functions:

  • Producing and releasing digestive enzymes in the small intestine to help in the digestion process
  • Releasing glucagon and insulin into the bloodstream to help the body use energy properly

According to the US National Library of Medicine, pancreatitis occurs when the pancreas becomes swollen. Damage to the pancreas as a result of pancreatitis or some other issue occurs when digestive enzymes that are normally released by the pancreas are activated before they are released into the small intestine.

There are two forms of pancreatitis:

  • Acute pancreatitis is inflammation of the pancreas that only lasts for very short periods of time and then resolves. Its severity may range from life-threatening to mild. The majority of cases of acute pancreatitis result in complete recovery, but in severe cases, there can be tissue damage, infection, and even the formation of cysts.
  • Chronic pancreatitis is long-lasting inflammation of the pancreas that continues after acute pancreatitis. There are various potential causes of chronic pancreatitis, including chronic alcohol use.

Medical researchers recently published their results (Click here for abstract) in a study of habitual alcohol consumers who also use cannabis concluding that those consumers who also use cannabis are at less risk for either acute or chronic pancreatitis as compared to those who do not use the substance. The authors concluded in their report that “our findings suggest a reduced incidence of only alcohol-associated pancreatitis with cannabis use”.

Developments like this contradict the basis of classification of cannabis under Federal law which makes cannabis illegal.

The Anti-Federal U.S. Climate

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, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back came from Department of Justice (“DOJ”) Safe Harbor Guidelines issued in 2013 under what is known as the “Cole Memo”.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government.  But on January 4, 2018, Attorney General Jeff Sessions revoked the Cole Memo.  Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.

Joyce-Blumenauer Amendment (previously referred to as the Rohrabacher-Farr Amendment)

Medical marijuana is now legal in 31 states plus the District Of Columbia, Guam, Puerto Rico and Northern Mariana Islands and recreational marijuana is legal in 9 states plus the District Of Columbia and Northern Mariana Islands. Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Farr, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.

The amendment states that:

“None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

This action by the House is not impacted by Sessions’ recent change of position with the DOJ. However, unless this amendment gets included in each succeeding federal appropriations bill, the protection from Federal prosecution of medical marijuana businesses will no longer be in place.

Fortunately for medical marijuana businesses in the last budget extension approved by Congress, this amendment was included. This means that the DOJ is precluded from spending funds to circumvent any of the foregoing states from implementing their medical cannabis laws.

Clearly, to avail yourself of the protections of the amendment, you must be on the medical cannabis side and you must be in complete compliance with your State’s medical cannabis laws and regulations. You may not be covered under the amendment if you are involved in the recreational cannabis side even if legal in the State you are operating.

What Should You Do?

Given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  Although cannabis is legal in California, that is not enough to protect you. 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, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

IRS court ruling

U.S. Tax Court Deals Another Blow To The Cannabis Industry

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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 §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.

Under IRC §280E, businesses that are engaged in trafficking controlled substances cannot take regular business deductions, so they end up paying taxes on their gross receipts less their allowed cost of goods sold (COGS). If an expense doesn’t fit into the category of COGS, a company that is considered to be “trafficking” would have to pay taxes as if the expense hadn’t been incurred in the first place. This is why cannabis businesses can end up paying a lot more in taxes than non-cannabis businesses.

One strategy that has been used for cannabis business is to set up operations using multiple companies with one of those companies being a “management company”. Most of the value of having a management company comes from the ability of the management company to get banking and enter into regular electronic transactions with third parties. Also, it was an untested way to avoid the harsh realities of IRC §280E – at least until now…

Alternative Health Care Advocates, et al v. Commissioner Of Internal Revenue

In the case of Alternative Health Care Advocates, et al v. Commissioner Of Internal Revenue, 151 T.C. 13 (Click here for the opinion), Alternative Health Care Advocates, Inc. (“Alternative Health”) operates a medical marijuana dispensary in West Hollywood, California. Related to this corporation is another company, Wellness Management Group, Inc. (“Wellness Management”), which provided management services to Alternative Health. These services included hiring employees and managing HR for those employees, paying wages for those employees, paying advertising expenses, paying rent, etc. Wellness Management did not provide services of that nature or any nature to any other business entity. Wellness Management made money by collecting fees for its services from Alternative Health.

Wellness Management recognized as income the management fees it charged to Alternative Health and Wellness Management deducted its expenses incurred in generating the management fees on the basis that Wellness Management was not engaged in the sale and purchase of marijuana but that it is a management services company that can engage in a separate line of business from the entity it manages.

While Tax Court recognized that Wellness Management and Alternative Health were legally separate entities, it was clear to the Court that Wellness Management’s employees were engaged in the purchase and sale of marijuana (albeit on behalf of Alternative Health); that was Wellness Management’s primary business. The Court did not read the term “trafficking” to require Wellness Management to have had title to the marijuana its employees were purchasing and selling going on further to state that neither IRC §280E nor the nontax statute on trafficking limits application to sales on one’s own behalf rather than on behalf of another. Therefore, the Court concluded that the management service company, Wellness Management, was engaged in the business of “trafficking in controlled substances” during the taxable years at issue and since Wellness Health was unable to identify any portion of its activities being non-related to marijuana activities, none of its expenses would be deductible.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

As long as marijuana remains a Schedule 1 controlled substance under Federal law, 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.


What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering this 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), San Diego County (Carlsbad) 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.

IRS tax deductible cannabis business expense court win

Harborside Finally Gets A Win In U.S. Tax Court Getting Tax Penalties Abated

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Having been beaten in an opinion issued by the U.S. Tax Court just weeks before where the Court ruled that IRC Section 280E does apply to Harborside (Click here for the Court’s opinion: Patients Mutual Assistance Collective Corp., dba Harborside Health Center v. Commissioner of Internal Revenue, 151 T.C. 11) which Harborside can appeal to the U.S. 9th Circuit Court of Appeals, it was a relief that this same Court ruled that the California dispensary is not liable for accuracy-related 280E penalties. Those penalties would have tacked on another 20% to the tax bill IRS is prepared to send to Harborside if the taxpayer does not appeal the previous decision.

The Anti-Federal U.S. Climate

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.

First Harborside Tax Court Opinion – IRS Code 280E will remain in effect for cannabis businesses

The Harborside case involved a dispute over the deductibility of business expenses taken by Harborside Health Center, recognized as the largest marijuana dispensary in the United States by revenue, and the IRS, which was enforcing the provisions of IRC Section 280E. Congress enacted this section back in the 1980’s so that taxpayers engaged in trafficking in a Schedule I or II controlled substances could not deduct any expenses other than Cost Of Goods Sold.

The Harborside dispensary introduced a novel argument about the inapplicability of IRC Section 280E to its activities and focused on two words in this code section – “consists of” – in making the case that this section of law does not apply to them. The Harborside dispensary highlighted the definition of “consists of” as it is used in IRC Section 280E when describing that business expense deductions are not allowed to taxpayers whose business “consists of” trafficking in a Schedule I or II controlled substance.  The Harborside dispensary pointed out, not without merit, that the phrase “consists of” generally introduces an exhaustive list. What this means is that when something is said to “consist of” a list of items, that list of items is the exclusive, exhaustive list, and no other unmentioned items can be said to be included in that list, since the enumerated list contains everything.

The Tax Court spent a considerable amount of time evaluating this argument and acknowledging that it had some merit based upon a review of the dictionary and other legal sources. However, what doomed the Harborside dispensary was the IRS argument, backed by case law, that a legal statute should not be read in such a constrained way so as to render it completely ineffective and toothless. The Tax Court, in ruling for the IRS on this issue, pointed out that if the Harborside dispensary’s reading of IRC Section 280E were correct, a drug dealer who also sold a single pack of gum could not have this same code section applied to him, as that drug dealer’s business would not consist solely of trafficking in a Schedule I or II controlled substance.

But since the Court did not establish a clear test as to when activities other than the sale of cannabis should be taxed differently that activities involving cannabis, there is still hope for cannabis businesses who invest in proper planning now can have the highest chance of prevailing should their tax returns be selected for audit.

Second Harborside Tax Court Opinion – Abatement Of Penalties

With the Tax Court’s previous ruling that IRC Section 280E denies all standard business deductions to businesses whose operations “consist” of activities that violate the CSA, we now turn to the Tax Court’s second opinion on whether Harborside should be subject to accuracy-related penalties.

IRC Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on the portion of an underpayment attributable to any substantial understatement of income tax or negligence or disregard of rules or regulations. Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Code, and disregard includes any careless, reckless, or intentional disregard. Sec. 6662(c). An understatement of a corporation’s income tax is substantial if it exceeds the lesser of $10 million or “10 percent of the tax required to be shown on the return for the taxable year (or, if greater, $10,000).” Sec. 6662(d)(1)(B). A taxpayer can avoid these penalties by showing that it acted with reasonable cause and in good faith. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. To decide whether a taxpayer acted with reasonable cause and in good faith, the Court look at all relevant facts and circumstances, such as the “taxpayer’s effort to assess the taxpayer’s proper tax liability” and his “experience, knowledge, and education.” Sec. 1.6664-4(b)(1), Income Tax Regs.

According to the Opinion issued by the Tax Court (Click here for the opinion: T.C. Memo. 2018-208), Harborside acted “reasonably and in good faith” when taking its tax positions for the years at issue. The Tax Court cited Harborside’s timely filing of its tax returns and its maintenance of accurate financial records as a key strength, along with a persuasive argument from Harborside co-founder and Chairman Emeritus, Steve DeAngelo, that he made good-faith efforts to comply with the law, despite a lack of clear legal authority to guide medical marijuana dispensary taxpayers.

This second ruling is relief for Harborside and shows the importance that with proper planning, taxpayers involved in cannabis should fare better in minimizing liability to IRS.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

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. 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.


What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering this 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.

bitcoin crypto loss

How To Use 2018 Cryptocurrency Losses to Your Advantage

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How To Use 2018 Cryptocurrency Losses to Your Advantage

While foreign governments are still figuring out how to tax cryptocurrencies, there are actually ways in the U.S. that U.S taxpayers can use them to their advantage to pay less taxes.  This is due to Notice 2014-21 issued by the Internal Revenue Service (IRS) which treats cryptocurrencies as an investment property, rather than a currency. Thus, whenever you trade cryptocurrency, the transaction is either a capital gain (where you make money) or a capital loss (where you lose money); and any losses this year could ultimately result in a smaller tax bill. Where your capital losses exceed your capital gains, you are still allowed to deduct up to $3,000 in capital losses. Losses beyond that amount get carried over to the next year to offset capital gains before applying another $3,000 excess loss application to your other income.

For example, assume a taxpayer bought $5,000 worth of BTC in 2018. After turning that into $10,000 through trading, he later lost cash due to a dip in the markets and took a big hit, losing $9,000. So he cashed out, walking away with just $1,000. Under this scenario he lost $4,000 in 2018 of which $3,000 he can still deduct in 2018 and the other $1,000 of loss gets carried forward to 2019.

Taxation of Crypto Currency.

Notice 2014-21 provides these tax rules:

  • Trading cryptocurrencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
  • Exchanging one token for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
  • Receiving payments in crypto in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
  • Spending crypto is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $500. If that coin was then worth $700 and you bought a $700 gift card, there is a $200 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
  • Converting a cryptocurrency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
  • Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain.
  • Mining coins is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
  • Initial coin offerings do not fall under the IRS’s tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.

Penalties For Filing A False Income Tax Return Or Under-reporting Income.

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment

The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.

What Should You Do?

With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Also, if you are involved in cannabis, check out how our cannabis tax attorneys can help you.