It’s no surprise that one of the most confounding aspects of owning a business is the regular accounting of income for the government (otherwise known as “doing your taxes”).
This is especially true for cannabis businesses, which are considered illegal federally but still required to submit a portion of their earnings to Uncle Sam.
A recent cautionary tale is often shared about Matthew Price, a medical marijuana dispensary owner-operator from Oregon, who was sentenced to seven months in prison last fall. Price is believed to be the first legal cannabis business owner given federal jail time for tax crimes.
Price pleaded guilty to failing to file income tax returns for his business along with not filing individual tax returns from 2011 to 2014.
Recent surveys show that cannabis-related industries are up to five times more likely to face a cash-business audit by the IRS. Though federal illegality likely contributes to increased inspection, canna-businesses also are generally unbanked, cash-heavy and don’t leave much of a paper trail.
These are all potential “red flags” authorities can look at when deciding which business require further inspection. Other potential red flags include:
• Perennial losses or low profit margins inconsistent with a successful business.
• Increasing bank balances or decreasing debt while profits remain flat.
• Owner lifestyle inconsistent with business profits.
• Persistently low sales.
Even more bad news for cannabusiness – taxes are collected under section 280E, the same section associated with the trafficking of Schedule I or Schedule II substance, defined by the Controlled Substances Act.
Internal Revenue Code Section 280E states that: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.”
In other words, cannabis retailers aren’t allowed the same deductions as businesses that don’t fall under 280E. Business owners, or even some tax accountants without 280E experience, who don’t know how Section 280E applies, may cause tax deficiencies for businesses and business owners, even if they do their best to stay on the correct side of tax laws.
These restrictions, however, may be good news for accounting firms familiar with cannabis companies.
On March 15, 2018, Washington Gov. Jay Inslee signed Senate Bill 5928, a part of which was intended to encourage CPAs to offer services to cannabis clients. Section (3) of the bill reads: “A certified public accountant or certified public accounting firm, which practices public accounting as defined in RCW 18.04.025, does not commit a crime solely for providing professional accounting services as specified in RCW 18.04.025 for a marijuana producer, marijuana processor, or marijuana retailer authorized under chapter 69.50 RCW.”
Washington’s Board of Accountancy points out, however, that it “cannot provide an assessment of the spectrum of risks that CPAs potentially face if they choose to engage with clients involved in the cannabis industry. Licensees are advised to seek their own legal counsel.”
In other words: proceed at your own risk, and hire a lawyer. When it comes to accounting and cannabis, the only thing that seems sure is that nobody should go it alone.
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