The IRS has been facing off against cannabis companies, causing more tax-related headaches and fears of audits. Cannabis businesses, as well as auxiliary businesses that operate with them, now face a high risk of audits and fines from the IRS.
Why is this happening? The source of friction is the difference between state and federal cannabis laws. The federal government insists on defining cannabis as a Schedule 1 substance, which likens cannabis to drugs like heroin.
When a state allows recreational marijuana, it’s at odds with federal law. Since the IRS is a federal entity, it doesn’t care if cannabis is legal in California or Colorado—it’s going to treat cannabusinesses differently, and often more harshly.
Two court cases have put the nail in the coffin for cannabis tax issues. In the first, California cannabis businesses took the IRS to court, claiming that, since cannabis was legal at the state level, businesses should qualify for federal tax writeoffs. The tax court said that wasn’t the case because of a tax code called 280E. 280E says that cannabis companies don’t get federal tax deductions that other businesses can claim.
If that weren’t difficult enough, in a second court case, a Los Angeles-based dispensary hired a management company to avoid tax penalties. Naturally, the IRS wised up to this and the court sided against the cannabusiness. Because of this court case, the IRS can now go after businesses related to the cannabis industry, like management, leasing, or even payroll.
The IRS is now launching a wave of audits for the cannabis industry under its Compliance Initiative Project (CIP). If a cannabis company isn’t complying with IRS rules, they face penalties in the millions. In these audits, the IRS will specifically look for missing filings, incorrect deductions, and cash payments.
The silver lining is that, although you currently can’t claim federal tax breaks, you can always look at the state level for deductions, which should be allowed.
Consult with a tax attorney to prepare your cannabusiness for an inevitable audit. This won’t just save you money on IRS penalties—it could be your key to staying in business.
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