Cannabis and marijuana businesses are some of the most difficult operations to run, especially from a tax and accounting perspective. Internal Revenue Code (IRC) Section 280E hits your profits and makes it much harder to understand what qualifies for deductions. If you make a mistake or don’t fully understand your federal tax liabilities, your case can get expensive fast.
Highland Tax Group wants to help if you are facing IRS scrutiny over deductions or a large, looming tax bill.
Section 280E Risks for Cannabis Businesses
280E prohibits businesses dealing in Schedule I controlled substances from deducting many business expenses that other businesses can deduct. Even though there have been some moves at the federal level to change the scheduling of marijuana, no federal agency or department has actually made any changes. So, if you have operated under the assumption that the rules changed or will change soon, the bill you received this tax season may have shocked you.
When the IRS reviews your filing, it will look at your bookkeeping, inventory records, purchase records, Cost of Goods Sold calculations, and whether your disclosures regarding 280E deductions include rationales that constitute a reasonable basis. You can also argue that part of the operation was a separate non-marijuana business, but that only applies when the non-marijuana activity is real, separate, and well-documented.
Should You Appeal or Cut Your Losses?
You should consider an appeal when there is a real dispute about the numbers; for example, if the IRS misread your books or rejected valid Cost of Goods Sold amounts. However, it might be best to cut your losses if your case is mostly a protest against 280E itself. Marijuana businesses have generally not done well with broad arguments that 280E should not apply to state-legal operations. The IRS can initiate investigations into your taxes and disclosures, even if your business complies with all state laws. You might avoid an audit, but it is not guaranteed.
These are big decisions, and you shouldn’t act without getting some help. An enrolled agent with Highland Tax Group can identify the issues worth fighting and tell you when it makes more sense to move to IRS resolution options. Contact them today.