california marijuana canabis growing

Big Win For The Marijuana Industry – Colorado District Attorney’s Office Rebuffs Attorney General Sessions’ Revocation Of The Cole Memo

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On January 4, 2018, U.S. Attorney General Jeff Sessions announced the revocation of what is known in the cannabis industry as the “Cole Memo”.

It is surprising that the Trump Administration known for its pro-business stance, allowed for such an anti-business decision to be made by Attorney General Sessions.  Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia.  However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

Colorado DA’s Office First To Officially Announce Continued Support Of The Cole Memo

The State Of Colorado legalized recreational marijuana in 2012.  It is big business in Colorado so it is not a surprise that the Federal District Attorney’s Office in that state was quick with its announcement stating “The Attorney General rescinded the Cole Memo on marijuana prosecutions, and directed that federal marijuana prosecution decisions be governed by the same principles that have long governed all of our prosecution decisions.  The United States Attorney’s Office in Colorado has already been guided by these principles in marijuana prosecutions — focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state.  We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement partners throughout Colorado.”

What Is The Cole Memo?

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal. The DOJ told its prosecutors that prosecuting medical marijuana cases in states where is has been legalized would no longer be a priority.

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?

What This Means For Marijuana Businesses

Hopefully other U.S. district attorney office’s will follow the same stance as the U.S. Attorney for Colorado in reaffirming a commitment to prioritizing violent and other serious federal crimes. As of this writing none of the four Federal district attorney offices in California have yet made any statement on whether they will still apply the Cole Memo.  Look to us for future updates on this.

What Should You Do?

Given the greater disparity in treatment between the Federal and California governments you need to protect yourself and your marijuana business from all challenges created by the Federal government.  Be proactive and engage an experienced attorney-CPA in your area.  Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Long Beach and other California locations protect you and maximize your net profits.

 

Attorney General Jeff Sessions Takes On The Marijuana Industry

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Attorney General Jeff Sessions Takes On The Marijuana Industry

On January 4, 2018, U.S. Attorney General Jeff Sessions announced the revocation of what is known in the cannabis industry as the “Cole Memo”.

It is surprising that the Trump Administration known for its pro-business stance, allowed for such an anti-business decision to be made by Attorney General Jeff Sessions.  Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia.  However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal. The DOJ told its prosecutors that prosecuting medical marijuana cases in states where is has been legalized would no longer be a priority.

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?

Under Sessions’ new guidance, the Cole Memo is overridden and U.S. Attorneys now 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.  Although the safe harbor guidelines are no longer in place at a national level, that does not mean that your local federal prosecutor will disregard their continued application in determining whether federal prosecution against a local marijuana business should be implemented.  But this is no guarantee so it is essential that you have legal counsel to back you up.

What Should You Do?

Given the greater disparity in treatment between the Federal and California governments you need to protect yourself and your marijuana business from all challenges created by the Federal government.  Be proactive and engage an experienced attorney-CPA in your area.  Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Long Beach and other California locations protect you and maximize your net profits.

 

Beware Of New Invoicing Rules And Taxes Starting In 2018 For California Cannabis Businesses

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The California Department of Tax and Fee Administration (CDTFA) which oversees the reporting and collection of taxes for the California cannabis industry under Emergency Regulation 3700 is proposing a new category and tax rate for the cannabis cultivation tax which will take effect January 1, 2018, along with the other existing cultivation tax rates.

Cannabis Cultivation Tax

The new category and tax rate for the cannabis cultivation tax as approved by California voters on November 8, 2016 (Proposition 64), established a cultivation tax based on the dry-weight ounce of cannabis flowers and leaves. The CDTFA has proposed a new cannabis cultivation tax category for fresh cannabis plants at a rate of $1.29 per ounce.

The cultivation tax rates are:

•$9.25 per dry-weight ounce of cannabis flowers,

•$2.75 per dry-weight ounce of cannabis leaves, and

•$1.29 per ounce of fresh cannabis plant.

All fresh cannabis plants must be weighed within two hours of harvesting.

The excise tax applies to all retail sales of cannabis and cannabis products starting January 1, 2018 including sales of cannabis and cannabis products retailers may have purchased prior to January 1, 2018.

If you are a cannabis retailer, you are required to collect the cannabis excise tax from your customers on each retail sale of cannabis or cannabis products starting January 1, 2018, and pay the excise tax to a distributor. Distributors are liable for paying the cannabis taxes to the CDTFA.

Invoice Requirements

Retailers are required to provide purchasers with a receipt or other similar document that includes the following statement – “The cannabis excise taxes are included in the total amount of this invoice.”

Recordkeeping

Every sale or transport of cannabis or cannabis products must be recorded on an invoice or receipt. Cannabis licensees are required to keep invoices for a minimum of seven years.

Distributors (or in some cases manufacturers) are responsible for collecting the cannabis cultivation and excise taxes, and the invoices they provide must include, among other specified requirements, the amount of tax collected.

Retailers, cultivators, and manufacturers must keep these invoices as verification that the appropriate tax was paid.

What Should You Do?

Start your marijuana business on the right track.  Be proactive and implement the proper cash management and accounting systems now.  Marijuana businesses who hire an experienced attorney-CPA should benefit in paying the least amount of tax under the tax code and if audited, the least audit adjustments and avoiding costly litigation. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Walnut Creek and other California locations maximize your net profits and get you the best possible result.

7 Moves To Make Before Year End That Can Save You A Lot of Money on Your 2017 Taxes

7 Moves To Make Before Year End That Can Save You A Lot of Money on Your 2017 Taxes

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On December 22, 2017, President Trump signed into law the 2017 Tax Cuts And Jobs Act. It’s been a good 30 years since the last time the Internal Revenue Code received such a major update.

Major Changes From The New Law Include:

Compressed And Lower Income Tax Rates For Individuals.

Increased Standard Deduction For Individuals

Elimination Of Personal Exemptions

Limitations of Deductibility Of Itemized Deductions including Mortgage Interest and State & Local Taxes.

Lower Corporation Tax Rates.

The Big Picture:

The tax rates are going down next year, so a deduction now is worth a lot more than it will be in 2018. On top of that, several popular deductions are disappearing next year or getting substantially limited and in combination with a nearly doubled standard deduction, less taxpayers will be itemizing deductions in 2018. The key here is to accelerate deductions into 2017 and defer income into 2018.

Following are seven year-end tax moves to make before this New Year’s Day:

1.Give more to charity in 2017.

In addition to the usual dollar donations to charities, religious institutions and educational institutions, consider clearing your home of those unwanted household goods and clothing to give to charities. Many groups will accept these items even vehicles, with some even making arrangements to pick up them up from your home. You may also consider to donate stock or mutual funds that you’ve held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio re-balancing nets you a deduction for the asset’s value at the time of gifting. Even better, you do not have to worry about capital gains taxes on the appreciation of your gift. Remember that if you take the standard deduction in 2018, you won’t get any tax savings from your charitable contributions made in 2018.

2. Make the most of your home – mortgage interest.

Home-ownership provides a variety of tax breaks, some of which you can use by year-end to reduce your current year’s tax bill. Make your January mortgage payment by December 31st and deduct the mortgage interest on your coming tax return. In 2018, the amount of mortgage interest you can deduct will be reduced (from $1,000,000 of principal indebtedness to $750,000 of principal indebtedness) so you will want to maximize the amount of mortgage interest paid in 2017. Another tactic is to try to prepay your home-equity loan interest. That deduction goes away next year, so it’s worth calling your bank and seeing if you can prepay at least some of the interest so you can get the tax savings in 2017.

3.Make the most of your home – property taxes.

Like prepaying mortgage interest, the same tactic will apply for property taxes which along with other state and local taxes will be deductible only up to $10,000 starting in 2018.

4.Pay State And Local Income Taxes in 2017.

Starting in 2018 property taxes and other state and local taxes will be deductible only up to $10,000. People who typically pay their state income taxes quarterly can easily pay the January installment before the end of 2017. Likewise if you have an outstanding income tax bill with your state or local tax agency or expect to amend a prior year’s state income tax return that will result in you owing money, consider paying or prepaying these liabilities in 2017.

5.Pay your self-employed business expenses now.

If you are self-employed, you should accelerate payment of your business expenses in 2017. Recognizing these expenses in 2017 when tax rates are higher will provide you with a greater tax savings.

6.Catch up and prepay your “miscellaneous itemized deductions”.

If you pay union dues or a professional society membership fee (e.g. a chamber of commerce or bar association) or buy a lot of supplies for your job (e.g., professional musicians buying new instruments) that you normally deduct as miscellaneous itemized deductions on your taxes, you’ll want to buy everything you can by January 1st. All of these expenses constitute Miscellaneous Itemized Deductions which are deductible to the extent the total is more than 2% of your adjusted income. But that deduction is going away entirely in 2018. Another deduction that’s going away in 2018 is for tax preparation services. Ask your accountant now for the invoice they would normally give you in April after they file your tax return. If you can pay it now, you can still deduct it.

7.Defer your income into 2018.

Consider delaying income until January 2018 when the tax rates are lower, especially if you are a small-business owner. So if you are chasing up some customers or clients to pay the bill you sent them a while ago, you might want to wait until January to get aggressive on collecting. Consider delaying the delivery of invoices for year-end jobs until January 2018. In addition to lower tax rates, small business owners get a generous benefit starting next year of being able to deduct 20% of their business income tax-free. If you are an employee, ask your boss to hold your bonus until January. Individuals should also consider putting more money into a tax-deferred workplace retirement plan in 2017 and hold off on selling assets that will produce a capital gain until 2018.

But Beware Of The Bite Of The Alternative Minimum Tax!

If you will be subject to the Alternative Minimum Tax (“AMT”) in 2017, paying those state and local taxes, your property taxes, and your miscellaneous itemized deductions before this January 1st probably won’t help you because the AMT requires you to add back all of these payments and recalculate your tax bill, so the benefit of paying them in 2017 goes away.

What Should You Do?

With not much time left in 2017 you will need to act quickly on those tax moves that are easy to accomplish to reduce your tax bill.

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, San Francisco 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.

Marijuana Businesses Substantiate To IRS Expenses Paid In Cash Are Your Cash expenses tax deductible?

How Do Marijuana Businesses Substantiate To IRS Expenses Paid In Cash?

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It is outrageous that the $6.7 billion U.S. cannabis industry is forced by disparities in state and federal law to conduct nearly all transactions in cash.  Experts believe that by 2021 the cannabis industry is expected to balloon to $21 billion.  The lack of banking opportunities for marijuana business and being forced to deal in cash creates challenges for these business to not only manage the cash but how to substantiate expenses paid in the event the business is select for audit by the IRS.

Yes – Marijuana Businesses Have to Report Income To IRS And Pay Taxes!

Legal marijuana businesses have to pay taxes under I.R.C. §280E, the same category reserved for illegal drug traffickers. Cannabis is categorized as a Schedule I substance under the Controlled Substances Act. While more than half of the states in the U.S. have legalized some form of medicinal marijuana, and several others have passed laws permitting recreational cannabis use, under federal drug laws the sale of cannabis remains illegal.

Supporting Business Documents

In any typical business, purchases, sales, payroll, and other transactions will generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. Keeping them in an orderly fashion and in a safe place will assure that if the time should come that you are selected for an IRS audit, you will be able to produce them and preserve the deductions claims.

Proof of Payments

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.

So what do you do when your marijuana business operates in a cash environment without using any bank accounts?

Step One: Incurred And Paid The Expense

For example, if you claim a $5,000.00purchase expense from a marijuana 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 marijuana business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

That is where it becomes essential that an accounting system be developedearly on to track these transactions.

Step Two: Deductibility Of The Expense

Next you must prove that an expense is actually tax deductible. For marijuana businesses this is challenging because I.R.C. §280E states: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedules I and II of the Controlled Substances Act, 21 U.S.C §812) which is prohibited by federal law or the law of any state in which such trade or business is conducted.”

In reading I.R.C. §280E one would think that no deductions are allowed in a marijuana-related business but if that were the case, the U.S. Tax Court has stated that this statute would have been stricken as unconstitutional as the Sixteenth Amendment to the U.S. Constitution prohibits the Federal government from taxing “gross receipts”. Reading vs. Commissioner Of Internal Revenue, 70 T.C. 730 (1978). So the way I.R.C. §280E operates is to allow marijuana-related businesses to deduct Costs Of Good Sold but not “ordinary and necessary” business expenses. This tax treatment prevails regardless that you are conducting a marijuana business that is duly licensed in a State that has legalized marijuana because such business is still illegal under federal law.

It should be apparent that the cost of acquiring the marijuana itself is part of Costs Of Good Sold but what if you produce the marijuana? We advocate that producers can also capitalize the direct material costs (marijuana seeds or plants), direct labor costs (planting, cultivating, harvesting and sorting), and certain indirect costs that include repairs, maintenance, utilities, rent, taxes, depreciation, employee benefits and officer’s salaries). Resellers too should consider a more expansive view of Cost Of Goods Sold that includes capitalizing the costs of transportation and other necessary charges incurred in acquiring possession of the marijuana and maintaining the inventory for resale.

That is why it becomes essential that a proper accounting system be developed to capitalize as much of your expenses into inventory in a manner acceptable by the IRS.

Getting The Money To IRS And State Tax Agencies

This same lack of access to a traditional banking infrastructure making it difficult for cannabis companies to establish exactly the kind of fiscal paper trail that the IRS and state tax agencies could use to help enforce tax compliance also creates a problem as to how to pay the taxes due to IRS and state tax agencies.  Keep in mind that this problem is just not a once a year event, it goes on all year – you have to remit your payroll taxes quarterly, your excise taxes are collected monthly. With all the cash to keep track of, the record keeping involved and the security of string and transporting funds, it is crucial that a proper cash management and accounting system be established and maintained.

What Should You Do?

Don’t wait to be selected for an IRS audit.  Be proactive and implement the proper cash management and accounting systems now.  Marijuana businesses who hire an experienced attorney-CPA should benefit in paying the least amount of tax under the tax code and if audited, the least audit adjustments and avoiding costly litigation. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, San Jose and other California locations maximize your net profits and get you the best possible result.

City Of Long Beach Rings In 2018 Opening Its Gates To Medical Marijuana Businesses

City Of Long Beach Rings In 2018 Opening Its Gates To Medical Marijuana Businesses

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Long Beach Municipal Code Chapter 5.90 – On November 8, 2016, the citizens of Long Beach voted to approve the regulatory portion of Measure MM, making it legal to own and operate a medical marijuana business in the City of Long Beach. The ordinance allows for medical marijuana dispensaries, delivery, manufacturing, cultivation, distribution, and laboratory testing. The newly added Long Beach Municipal Code (LBMC) Chapter 5.90 requires medical marijuana businesses to be licensed by the State following the State issuing licenses beginning in January 2018.

Marijuana Business Licenses

On November 8, 2016, California voters approved Proposition 64, the Adult Use of Marijuana Act (AUMA). AUMA created a statewide regulatory and licensing system for adult-use marijuana businesses. On June 27, 2017, Governor Jerry Brown signed into law the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which merged regulations for medical and adult-use cannabis into a single regulatory framework. MAUCRSA grants local governments the ability to regulate and/or prohibit commercial marijuana activity within their jurisdictions. The State of California will issue temporary marijuana licenses beginning January 1, 2018 pursuant to Business and Professions Code Section 26050.1. In order to apply for a State temporary license, Applicants must provide evidence of a valid license, permit, or other local authorization.

The Business License Division within the Department of Financial Management is the licensing authority for all medical marijuana businesses in the City of Long Beach. Long Beach will accept applications only for medical marijuana businesses. Currently, Long Beach is not issuing licenses for recreational marijuana businesses. Long Beach will shut down and prosecute any marijuana business located in the City of Long Beach that does not have the required licenses.

Available Medical Marijuana Business Licenses in Long Beach

Five types of medical marijuana business licenses will be issued in the City of Long Beach:

Medical Marijuana Dispensary

Medical Marijuana Cultivation Facility

Medical Marijuana Manufacturing Facility

Medical Marijuana Distribution Facility

Medical Marijuana Testing Laboratory

Status Of Businesses Providing Adult-Use (Recreational) Marijuana in Long Beach

On November 14, 2017, the Long Beach City Council voted to request the City Manager to work with affected City Departments to develop recommendations to legalize and regulate commercial adult-use (recreational) marijuana businesses in Long Beach. The City Attorney will report back to City Council with a draft ordinance to allow, license, and regulate the retail sale, cultivation, manufacture, distribution, and laboratory testing of adult-use marijuana in Long Beach by June 2018.  In the meantime starting November 14, 2017, a temporary ban is in effect for the next 180 days, prohibiting the operation of any commercial adult-use marijuana activities in Long Beach. This ban does not apply to medical marijuana business licenses.

Procedure For Licensure

The State of California will issue temporary marijuana licenses beginning January 1, 2018. In order to apply for a State temporary license, Applicants must provide evidence of a valid license, permit, or other local authorization. The City of Long Beach will issue a letter of local authorization for an applicant to obtain the temporary State license if the proposed medical marijuana business has completed the following tasks:

  1. The Applicant has submitted the Medical Marijuana Business License Application, Operating Plan, Supplemental Information, and applicable fees to the City of Long Beach and such application has been determined by the City Manager or his or her designee to be complete;
  2. The City’s Planning Bureau has conducted a review of the proposed business location and has deemed the application to be in compliance with all applicable buffer distance requirements as set forth in LBMC Section 5.90.030 and Section 5.90.060, as applicable;
  3. The Applicant has submitted all required plans for plan check approval for review by the Department of Development Services and had such plans approved;
  4. The Applicant has been issued a valid building permit for the approved marijuana use at the proposed business location by the Department of Development Services; and
  5. The Applicant has paid all applicable business license taxes and fees.

The letter of local authorization does not grant a business the right to operate in Long Beach. The letter of local authorization is exclusively intended to assist marijuana businesses in initiating an application for a temporary license with the State to obtain the license in a timely manner. Upon receiving the State temporary license, a medical marijuana business can start operating in Long Beach beginning January 1, 2018 provided that the businesshas been issued all necessary and valid local permits for the proposed business location and the City has issued a valid City of Long Beach Medical Marijuana Business License.

Acceptable LocationsIn Long Beach For Medical Marijuana Businesses

Proposed medical marijuana facility locations must comply with the restrictions laid out in LBMC Section 5.90.030:

  1. No Medical Marijuana Business may be operated in an area zoned exclusively for residential use
  2. No Medical Marijuana Business may be located within one thousand (1,000) foot radius of a public or private school (as defined in Health and Safety Code 11362.7689(h));
  3. No Medical Marijuana Business may be located within one thousand (1,000) foot radius of a public beach;
  4. No Medical Marijuana Business may be located within a six hundred (600) foot radius of a public park or public library;
  5. No Medical Marijuana Business may be located within a six hundred (600) foot radius of a day care center (applications submitted before January 1, 2018 are exempt from this requirement); and
  6. No Medical Marijuana Dispensary may be located within one thousand (1,000) foot radius of another Medical Marijuana Dispensary.

What Should You Do?

Whether starting a new marijuana business or acquiring/selling an existing marijuana business, be proactive knowing that you have hired tax counsel to implement the proper cash management and accounting systems now.  Marijuana businesses who hire an experienced attorney-CPA should benefit in paying the least amount of tax under the tax code and if audited, the least audit adjustments and avoiding costly litigation. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Long Beach and other California locations maximize your net profits and get you the best possible result.