Moderates postpone crucial vote

The Federal government is inching its way towards rescheduling marijuana, but is not there quite yet as evidenced by Steve Neavling’s post on September 21, 2020 (excerpted below):

The house was scheduled to vote next week on the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which would remove cannabis from the Controlled Substances Act, expunge some criminal records, and create funding for people and communities impacted by the War on Drugs.

“Right now, the House is focused relentlessly on securing agreement to stave off a damaging government shutdown and continuing to do its job addressing the COVID-19 pandemic,” Hoyer told The Hill. “Later this autumn, the House will pass the MORE Act with strong support as yet another crucial step toward making our justice system fair for all Americans.”

The good(ish) news

The fact that these discussions are occurring at the federal level confirms movement in the right direction. However, 280E still applies to marijuana businesses and legalization may not expunge penalties incurred due to aggressive past tax filings once marijuana is rescheduled. Businesses that jumped in early to capitalize on the green rush opportunity should focus resources on managing the many layers of compliance risk. Income taxes under 280E comprise just one of those layers. Our advice?? Expect an IRS audit and be ready to defend cost of goods sold, which is the only tax deduction a marijuana business is allowed according to 280E.

There are three types of businesses in this industry: a) those that are well capitalized, b) those that are not, and c) those that are well managed. Those that are well capitalized can afford IRS audit fees, back taxes, and interest/penalties to cover past bad choices. Those that are not well capitalized could suffer from a multi-year IRS examination. Those that are well managed assess and manage risk. What kind of business is yours?

The bad news

The audits are coming, the audits are coming! In September of 2019, the IRS announced plans to increase the number of audits of marijuana businesses. The IRS currently audits one in five marijuana businesses. Here Keegan Peterson of mg Magazine discusses how to handle IRS audits.

What now?

Embracing the likelihood of being audited as a marijuana business can give you a strategic advantage. Make sure your business is audit ready – maintain clean records and support for your 280E allocations. Those that do not sufficiently allocate capital resources to reporting will learn the hard way, likely getting crushed beneath the weight of back taxes, penalties, and interest. Anxious to understand how your accounting and record keeping could be improved? Unsure as to whether or not your cannabis business could survive an IRS audit? Contact me anytime. At Akene, we have your back!