With the legalization of medical and recreational cannabis in California there has been an increase in inquires to our office by people who are just entering into the cannabis market place or looking to provide services to the cannabis market place or looking to bring an existing cannabis operation into legal compliance. We also have been receiving inquiries from people and businesses who are subject to Federal, State or Local government action including the need for defense of tax evasion charges and money laundering charges.
Under the Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812, marijuana is classified 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; and therefore the CSA prohibits the cultivation, possession, and distribution of marijuana. Violations carry criminal implications that include incarceration if convicted.
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 I.R.C. §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. Cannabis, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis 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.
The IRS issued a memo to provide guidance to its agents on conducting audits of cannabis businesses addressing whether an IRS agent can require a taxpayer trafficking in a Schedule 1 controlled substance to change its tax accounting to conform to I.R.C. §280E.
Not surprisingly that the IRS ruled that IRS agents have the authority to change a cannabis business’ method of accounting so that pursuant to I.R.C. §280E costs which should not be included in inventory are not included in Costs Of Goods Sold (“COGS”) and remain non-deductible for income tax purposes.
So Who Are You Going To Call?
Despite the high stakes risk in operating a cannabis business, many new attorneys have entered into the legal cannabis marketplace with mass advertising on the internet offering their services to bring cannabis entrepreneurs into compliance. However, when it is shaping up that the biggest risk in cannabis is dealing with the taxes, who do you call?
Four Things You Should Consider In Making Your List Of Cannabis Tax Attorneys To Call:
- When It Comes To Taxes And Business Issues, Only Deal With Cannabis Tax Law Firms. Make sure the company is a cannabis tax law firm and not a general law firm. Cannabis businesses are subject to unfavorable tax provisions and restricted banking provisions which violations carry criminal exposure. Having a cannabis tax attorney as a resource allows all of these issues to be effectively addressed by one firm.
- Look At The Cannabis Tax Law Firm’s Practice Area. Check out the firm’s website to determine the cannabis tax attorney’s major practice areas. Do they have information where they talk about new developments by the Federal government, State laws and regulations, local ordinances and other related stuff? Many of them have that in their blog or news area. That way you knew they have some idea and most likely experience in dealing with such cases.
- What Access To The Cannabis Tax Attorney Is Being Offered. As most of the stuff can be done via email/phone/mail you do not need to be so focused on where the cannabis tax law firm is located. Instead be focused on securing access to the cannabis tax attorney and that the cannabis tax attorney will be able to access your situation and come up with a plan.
- Does The Cannabis Tax Attorney Offer An Initial Strategy Development Session? While some firms may offer a free initial consultation, you should seek those cannabis tax attorneys who provide an analysis of your situation and communicate a complete strategy in the initial session. Such attorneys will likely charge for that session but the value you get from it should greatly exceed the fee and should allow you to make the right the decision which could save you thousands of dollars and preserve your freedom.
What To Ask The Cannabis Tax Attorney In Your Initial Session?
- Discuss the situation. Let the attorney know that (a) you did not report income earned your cannabis business and (b) how you have resorted to deal with monetary transactions outside of traditional banking channels. Once you tell that, the attorney should start asking more details. Everything that is discussed should be protected under the attorney-client privilege.
- The Process. After hearing your information, the attorney should suggest what he thinks is best in your case and tell you what the process would be like. In your initial session you should let the attorney review any of your relevant documents (i.e., tax returns, financial information, etc.).
- Charges & Penalty. Ask the attorney how bad is your situation. Ask how good the chances of you getting cleared from criminal charges are. Ask what can be the maximum penalty and how good are chances of getting penalties waived or reduced. Ask what would be his strategy or reasoning to get relief and minimize your tax burden.
- Time. Ask the attorney how long will the entire process take or at least what he expects how long each step or phase could take.
- Price. Ask the attorney what he would charge for the entire process or at least each step or phase to be pursued. You should find that firms typically charge based on time spent and costs incurred given the many variables involved and sometimes multiple agencies involved. Firms who charge in this manner will usually have different levels of staff whose rates vary based on their level of skill or expertise so you should ask who else would be involved, their rates and impact to the total time charges. Some firms may even offer alternatives that if certain tasks are delegated to you or other third parties such as an accountant, the amount charged by the tax law firm can be less.
- Experience. Ask the attorney how up to date he is with the most recent changes in cannabis policy on local, state and federal levels and how familiar he is with how various judges, courts and government agencies tend to treat cannabis cases. Check to see that the attorney is Board-Certified In Tax Law. What other credentials does the attorney have – LL.M.(Tax) Degree, C.P.A. License?
How Do You Know Which Cannabis Tax Attorney Is Best For You?
Considering the tax 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 San Francisco Bay Area (including San Jose and Walnut Creek) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. And if you are involved in crypto currency, check out what a Bitcoin Attorney can do for you.