As many as 90% of Cannabis Businesses use improper accounting procedures, wasting critical cash resources by overpaying taxes. Worse yet, many are at risk of being fined or penalized by the IRS, or even shut down for noncompliance.
IRS Chief Counsel Advice (“CCA”) 201504011 codified the cannabis-related expenses that can be assigned to Cost of Goods Sold (COGS). These include wages, rents, and repair expenses directly attributable to production, but not wages, rents, or repair expenses not directly attributable to production, or marketing activities. BUT, if a business produces financial statements that conform to accounting standards generally accepted in the United States of America (GAAP), it may include (deduct) certain additional costs.
The Tax Equity and Fiscal Responsibility Act of 1982 added Section 280E to the Internal Revenue Code, which disallows the deduction of normal business expenses, requires full absorption accounting, creates an effective tax rate of 75%, and requires costly expense tracking and tax planning. The Treasury Inspector General for Tax Administration (TIGTA) in March 2020 estimated that enforcement of IRC 280E will generate over $475 Million in taxes over the next five years - in short, audits of these businesses are almost certain to increase dramatically.
According to §1.471-3(b), the IRS has interpreted this section of the IRC to mean that cannabis businesses are permitted to deduct expenses related to inventory as COGS only. For cannabis producers, §1.471-3(c) and § 1.471-11 of the IRC define how these businesses should treat cannabis production costs and define which expenses they are permitted to deduct as COGS. Due to the strict enforcement of this regulation, owners are strongly encouraged to employ specific accounting procedures that most CPAs are simply ill-equipped to help with.
Cash receipts of more than $10,000 in a single transaction, or in two or more related transactions within 12 months, must be reported on Form 8300 within 15 days. The penalty for failure to file on time is $100 per occurrence, limited at $500k for businesses with gross receipts of $5 million or less unless corrected within 30 days, which reduces the max penalty to $75,000; businesses with more than $5 million in sales could be fined up to $1.5 million, and deliberately failing to file the form carries a penalty of $25,000 or the actual amount received up to $100,000 for each occurrence, whichever is greater.
The reason it is so hard to get a bank account for your CBD or cannabis business is because of the inherent risk and compliance burden that your bank will need to manage. The issue is that marijuana and CBD businesses are cash-intensive so they face higher risks of money laundering or other criminal activities. And marijuana is still a Schedule 1 drug, so accepting deposits from businesses that handle the plant or its products can be deemed money laundering. Plus, under federal law, money obtained from illegal transactions cannot be FDIC insured, and banks are required to insure all their depository accounts.
The branded card networks do not permit cannabis transactions. This applies to both credit and debit networks. But this is not a law, so this isn’t where you’ll get in trouble running dispensaries that accept credit cards. The legal issue is that in order to offer cannabis debit and credit card processing, some payment schemes use workarounds to try and fool the branded networks (meaning, they lie about what kinds of transactions you’re doing). By lying about what items you’re selling, you are lying to a financial institution, which is a federal crime with fines up to $1,000,000 and up to thirty years in prison.
Cannabis companies are regularly hit with audit requests as they struggle to untangle complex tax codes. We can help save you time and money by:
Entity structure, financial analysis, compliance and more. We can help:
Audit preparation and IRS audit defense. We provide valuable insight to help your cannabis business grow:
Maintaining accurate and compliant financial records is critical to understanding your business. We reduce the time it takes to close your books and limit errors, design a consistent process that conforms to applicable financial reporting guidelines, and streamline reporting to all of your company's stakeholders. We also evaluate the control environment and document your existing procedures, assist in designing new ones that improve efficiency, and create centralized information solutions so that you can manage performance and business management.
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