Cannabis businesses nationwide have been exploring strategies to work around IRS code 280E, which prohibits businesses involved in Schedule I or II controlled substances from deducting ordinary business expenses or claiming tax credits on their federal tax returns. But many businesses are facing an unsuccessful 280E audit, which can result in high back taxes, interest, and possible penalties.
Some of the strategies cannabis businesses are using to avert 280E include:
- Claiming 280E doesn’t apply to state-legal licensed medical cannabis businesses.
- Labeling expenses as cost of goods sold rather than ordinary expenses.
- Establishing separate legal entities for cannabis and non-cannabis activities.
Despite these strategies, the IRS is taking a strict stance on cannabis businesses that have tried to skirt the restrictions 280E imposes on business deductions. The agency is rejecting most 280E positions on tax returns.
So, if the IRS has audited your business and denied your claims, what can you do?
Request an IRS Appeals Conference
After the audit, you’ll receive a 30-day letter from the IRS. If you want to dispute the audit findings, you can request a conference with the IRS Independent Office of Appeals. You’ll need to provide in writing the reasons that you disagree with the audit findings.
File for Audit Reconsideration
This option is available to you only if you have new documentation that supports your position on your original tax return.
File a Petition in U.S. Tax Court
If your appeal fails, the IRS will send you a Notice of Deficiency, and you’ll then have 90 days to file a petition in U.S. Tax Court. If the Tax Court rules against you, you can continue your appeal with the U.S. Court of Appeals. Keep in mind that this route can be a long, drawn-out process, and your chances of success are not especially high.
Request a Penalty Abatement
If the IRS assessed penalties for an inaccurate return based on your failed 280E position, you can try to show that your tax position was reasonable and therefore the inaccuracy penalties don’t apply.
Call Highland Tax Group for Help
280E is placing a strain on many cannabis businesses, which are having to pay excessive taxes on their gross income rather than net profits. It’s hard to skirt 280E restrictions, but the Highland Tax Group can help you navigate the intricacies of an unsuccessful 280E position. Call our tax professionals at 720-398-6088 to get the most favorable tax outcome for your business.