California cannabis dispensaries and producers face many IRS & California tax challenges. From the infamous IRC 280E which effectively denies business tax deductions to the Office of Chief Counsel’s position on COGS for cannabis businesses, marijuana entrepreneurs operate in a hostile Federal tax environment. Moreover, while California has legalized recreational marijuana and fostered a thriving cannabis industry, it has also imposed burdensome tax regulations that heavily tax cannabis dispensaries, making even well-run cannabis businesses targets for audit. In light of the combined effect of hostile Federal tax law and burdensome State regulations, it’s unsurprising that many cannabis businesses utilize tax attorneys to reduce tax liability.
Sales Tax Audit Defense
Marijuana retailers are tasked with collecting not only sales taxes but also excise and local cannabis taxes. Moreover, the frequency of sales tax filings and prepayment requirement for dispensaries with over $17,000 in monthly sales has left many cannabis retailers with failure to file or pay penalties – including the 50% failure to pay penalty unique to the cannabis industry. In light of the array of penalties applicable to cannabis businesses, the CDTFA has invested in auditing California cannabis retailers. If your marijuana dispensary is under audit or has received a notice of determination, consult with marijuana tax attorney Jin Kim to learn more about your tax relief options.
IRS Tax Issues
As every cannabis entrepreneur knows, IRC 280E prevents businesses that traffick in marijuana from deducting business expenses. The statute, which was borne out of a cocaine traffickers’ ability to deduct business expenses, has been applied by the IRS to the cannabis industry. While some marijuana dispensaries have been able to deduct some expenses under the premise that they operated 2 businesses, one of which did not traffick in marijuana, the majority of marijuana dispensaries have not fared well with that argument.
In light of the limited success of marijuana dispensaries to deduct expenses utilizing the ‘2 separate businesses’ argument borne out of CHAMP, marijuana businesses have looked to COGS to mitigate their effective tax liability. Unfortunately, and in tune with the IRS’s attitude towards the cannabis industry, the Office of Chief Counsel has taken a position on the calculation of COGS that prevents cannabis taxpayers from including many otherwise deductible expenses. Nevertheless, correct utilization of COGS does mitigate tax liability and should be pursued with aid of an experienced CPA with adequate records for substantiation.
Tax Resolution Options For Cannabis Businesses
Marijuana dispensaries with undisputed tax debt have tax resolution options that are best identified through a free consultation with an experienced tax attorney. Generally, installment agreements can be a viable option for repaying payroll taxes and sales tax arrears. Offers in Compromise may also be available where there is doubt as to collectibility.
If your cannabis business has been assessed additional tax liability by the IRS or CDTFA, call California tax lawyer Jin Kim at (916) 299-9913 for a free tax resolution consultation.