Business
Opinion: Cannabis businesses could recoup millions on exit, thanks to ‘280E asset’
A combination of tax methods could help cannabis companies reduce their tax burden under Section 280E of the federal tax code.
If recent case law is applied equitably, the cannabis industry could be sitting on millions of dollars in unclaimed federal tax refunds.
The first, a method I call “the 280E asset,” is supported by very old case law and a recent federal claims court decision that barred the practice of deductions being recognized as basis.
Basis refers to a business owner’s investment in a business and that company’s investment in its assets.
For example, if a taxpayer buys an airplane for $1 million and then immediately sells it for $1.5 million, that’s a basis of $1 million and a gain of $500,000.
The 280E asset accepts that Section 280E prohibits the deduction of costs that cannot be recognized as cost of goods sold (COGS).
It also posits that 280E cannot permanently disallow the recognition of ordinary and necessary business expenses.
Under this theory, 280E expenses cannot be deducted in the year they are incurred, but they must be allowed as basis in the business or its assets and recognized on exit (when the business is sold) or when permitted under the taxpayer’s accounting method (more on this later).
U.S. tax law provides that if costs such as depreciation are deducted during the life of a business, you can’t recoup them (again) on exit.
Case law at work
In CBS Corp. & Subsidiaries v. U.S., the federal claims court held that disallowed expenses that were not personal in nature (just like 280E expenses) had to be recognized and allowed as basis and thus reduce gain on exit.
The costs at issue were depreciation of an airplane that was leased to a foreign commercial airline.
At the time, U.S. law provided that 30% of foreign source income was exempt from tax and the same corresponding 30% of deductions were disallowed (just like 280E).
CBS Corp. recognized the law and depreciated only 70% of the airplane.
The issue in that case was whether the taxpayer could reduce its gain on the sale of the airplane according to the 30% that was not depreciated during the life of the business.
The IRS argued in court that the airplane had to be treated as two types of property – one for which deductions were allowed and another for which they were never allowed (the same treatment is applied to cannabis business under 280E).
The court did not agree and instead held that disallowed deductions for ordinary and necessary business expenses resulted in “erroneous inflated gains, warranting the claimed tax refund.”
The marijuana industry is well acquainted with the erroneous inflated gains created by 280E, but it hasn’t seen many refunds.
If the CBS case holds true for the industry, it means millions in federal tax refunds should be available to companies and owners on exit.
Prepare for opposition
In claiming refunds for 280E costs, cannabis companies will likely be met by an opposing argument: Because the IRS can permanently disallow other expenses (bribes, personal expenses, meals, etc.), it can permanently disallow all deductions under 280E.
In the CBS case, the IRS made the same argument and pointed to past situations in which airplanes with personal and business use were permanently denied deductions for the personal-use portion.
Here, the court distinguished such cases as “inapposite” because they involved disallowed personal expenses.
But because Section 280E costs are ordinary and necessary business expenses, the IRS should recognize that they cannot be permanently disallowed.
The court’s decision in the CBS case is far worse for the government than 280E.
In that case, the taxpayer was allowed all of its deductions and 30% of its income was excluded from tax (resulting in a windfall).
Cannabis companies, meanwhile, pay tax on their 280E costs and, under the CBS case, they still must carry them until exit.
The good news is that under Section 471(c) of the 2017 Tax Cuts and Jobs Act, small businesses might not have to wait until exit any longer.
Section 471(c) is a statutory law and accounting method under which the tax rules that limit COGS do not apply.
Instead, the taxpayer can report its COGS according to its books and records.
Like the 280E asset theory, Section 471(c) should work because 280E merely disallows the “deduction” of an expense but does not permanently delete it.
If the law provides an accounting method that allows a deductible expense to be accounted for as COGS, 280E should not disallow it.
Because 471(c) allows the taxpayer, rather than the IRS, to determine its COGS, it might be the method that allows recovery of costs that cannot be deducted under 280E.
These are complicated concepts that require the assistance of a qualified tax professional.
That said, it appears that cannabis companies are more profitable than was previously thought because, under the CBS case, current and historic 280E costs should be recoverable on exit or as a component of COGS if permitted under the taxpayer’s accounting method.
Source: https://mjbizdaily.com/cannabis-businesses-could-recoup-millions-from-280e-asset/
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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