1. Section 280E workarounds or loopholes do not generally exist
Without deductions and credits, some cannabis companies face an effective tax rate of up to 80%. It’s no wonder that business owners unwisely have sought ways to circumvent Section 280E. But too many have learned the hard way that aggressive and risky Section 280E strategies do not succeed.
Some companies have incurred penalties for incorrectly allocating expenses into cost of goods sold and improperly allocating costs to nonplant-touching lines of business. Many cannabis companies are currently in litigation, and ones that have pursued litigation have been regularly defeated by the government.
2. Rigorous accounting is essential to managing tax liability and attracting investment
Cannabis businesses that seek to optimize their tax positions diligently work to fully understand the tax laws and improve inventory accounting and finance operations. They establish consistent methodologies, detailed documentation, and reports that can stand up to an audit. In essence, they follow current cannabis accounting practices to the letter.
This approach addresses Section 280E tax compliance, and it lays the foundation for long-term growth. Conversely, companies with disorganized or inadequate accounting practices often struggle to attract investment.
3. Cannabis businesses should expect IRS scrutiny
Here’s another reason to improve accounting practices: The IRS continues to signal that it will aggressively audit cannabis companies and penalize violators. In September 2020, the IRS released a brief FAQ on cannabis taxation that reiterated its long-time stance. As long as marijuana remains a Schedule 1 or 2 substance under the federal Controlled Substances Act, the agency will strictly enforce Section 280E.
All cannabis businesses should expect an IRS examination sooner or later. But they should not expect the IRS to significantly negotiate or forgive any tax filing missteps or improper deductions. A well-documented defense will be required.
As regulations for the cannabis industry evolve and shift, stay up to date regarding changes to Section 280E and revisit the implications to tax planning, as necessary.
