IRS Code Section 280E can bring a cannabis business to its knees, and paying 280E tax debt can be even trickier. 280E severely restricts expenses that cannabis businesses can deduct and often leads to excessive tax debt for these businesses. As a result, a lot of legitimate marijuana businesses are struggling to stay solvent following a 280E audit. Especially if you file incorrectly by claiming unallowable ordinary business deductions and then incur penalties on top of your actual taxes, 280E can put you out of business.
If your cannabis business ends up with a huge tax liability, you have options for handling your tax debt and working with the IRS to pay it in a realistic manner. So, what are the pros and cons of an installment agreement versus an offer in compromise for paying your tax debt, and how do you decide on the best approach?
The tax professionals at Highland Tax Group can help you answer these questions and figure out the best strategy for surviving the consequences of 280E.
Option A: An Installment Agreement
An installment agreement is a payment plan that you and the IRS agree upon to pay your debt in full over a period of time up to 5 years. If you expect your cannabis business to maintain a steady cash flow and you think you can reasonably pay the monthly amount, an installment agreement may be the way to go when your tax debt is too large for your business to immediately pay completely.
An installment agreement requires less paperwork than an offer in compromise, and the IRS will accept an installment agreement more easily. Keep in mind that while an installment agreement will stop the IRS from pursuing collection efforts such as levies and liens, you’ll still have to pay interest and any penalties resulting from the audit.
Option B: An Offer in Compromise
An Offer in Compromise is essentially a settlement agreement where the IRS accepts a lesser amount than the full tax debt. You’ll have to prove that your cannabis business is unable to pay the full amount, which involves providing extensive and detailed financial disclosures.
If 280E is forcing your cannabis business to close, become insolvent, or lose assets, an Offer in Compromise may be the most realistic option. If you’re going out of business, the IRS will likely realize that its collection efforts will be unsuccessful, and an offer in compromise might therefore be the best answer for you both.
Surviving 280E
280E audits—and their consequences for your business—can be extremely complex. If your cannabis business is facing a 280E audit or you’re trying to figure out how to manage your massive resulting tax debt, Highland Tax Group can help you keep your head above water. Contact our tax professionals, and we’ll help you survive 280E.