Tax expert and IRS trial lawyer Nick Richards has issued a warning for the cannabis commerce industry – 280E audits are on the way. According to Richards, recent changes in IRS policy could lead to audits and subsequent fines and collected taxes that would amount to millions.
26 U.S. Code Section 280E is the federal statute that states that a business engaging in the trafficking of a Schedule I or II controlled substance, such as cannabis, is barred from taking tax deductions or credits.
In layman’s terms, cannabis entrepreneurs are required to pay taxes on all of their revenue without the benefit of being able to use business expenses to reduce their taxable income.
While it has been argued that 280E shouldn’t apply to legal cannabis companies, in two key court cases in 2018, Tax Court ruled against:
No – the change in policy will also allow for 280E audits of ancillary management companies, such as those that lease property to cannabis businesses, landlords, and anyone else that directly profits from cannabis sales.
An IRS program, known as the Compliance Initiative Project, is tasked with auditing the state-legal cannabis industry. It was originally meant to only examine businesses in Colorado, but as states have continued to legalize cannabis, its scope has been expanded.
This program uses an audit technique guide based on the Colorado cannabis industry, which will help auditors to consider what could be years of missing tax forms that are required for cash payments of more than $10,000, which could mean penalties amounting to millions of dollars.
Like this article? Check out the following blogs to learn more:
Fill in your information below: