Business
Small marijuana businesses take advantage of purported 280E loophole
A growing number of marijuana businesses are taking advantage of a tax strategy that might reduce the costly financial burden imposed by Section 280E of the federal tax code.
Small businesses with a gross income of less than $27 million are able to deduct expenses to a “near-legal” degree, according to accountants specializing in cannabis.
By one estimate, marijuana companies paid nearly $2 billion more in federal taxes than mainstream businesses.
But not all certified public accountants are on board with using the relatively new tax strategy, and they warn cannabis entrepreneurs that using it could be risky.
Section 280E currently prevents plant-touching companies from deducting many traditional business expenses because marijuana remains a Schedule 1 substance and illegal under federal law.
In recent years, a growing number of accountants and professionals specializing in cannabis discovered a small business provision within 2017’s Tax Cuts and Jobs Act.
The provision, called Section 471(c), was designed to simplify accounting for inventory and cost of goods sold (COGS) for businesses with less than $25 million in gross income.
“For example, if a business wants to include 100% of its facility costs in its inventory calculation, it could do that if it is based on the company’s books and records,” said Justin Botillier, the founder and CEO of Oregon-based accounting firm Calyx CPA.
In other words, a cannabis retailer could include expenses associated with renting a storage facility for inventory in its cost of goods sold.
For some businesses, the tax savings from including such expenses under inventory costs can be significant.
“We can get taxes down to near-legal levels,” Botillier said in an interview with MJBizDaily.
Section 280E has been one of the toughest barriers to success for U.S. cannabis businesses.
Tax liabilities are so high for some multistate operators, they’re deferring payments while weighing the impact of penalties against the higher costs of raising capital.
Chicago-based Verano Holdings, for example, will carry a balance of roughly $250 million in taxes owed after paying about $100 million.
While Section 471(c) is helpful only to smaller companies, it “has become the single most important development for the cannabis industry,” said Nick Richards, the Denver-based partner and co-chair of cannabis law practice group at Greenspoon Marder.
Richards explained the legal background of 471(c) in a letter to the editor in a recent edition of Tax Notes, a tax-focused publication.
According to Richards, costs disallowed under Section 280E do not “disappear” – they just cannot be deducted under the old accounting methods.
But under Section 471(c), the limitations of the old accounting methods no longer apply and some of the costs can be recognized as COGS.
This creates the possibility of recapturing costs that were previously disallowed under 280E before the use of the 471(c) method.
But while a growing number of CPAs are using it, there are still a number of accountants who won’t use 471(c), arguing that 280E disallows any kind of deduction and could invite audits.
The background
The Tax Cuts and Jobs Act was passed in 2017.
Under Section 471(c), companies with a gross income of $25 million or less can choose if and how they track and report inventory (now $27 million, adjusted for inflation).
That includes capitalizing overhead, according to Botillier, meaning a business could include payroll and facility-related costs in its inventory calculation – and therefore deduct some of them from gross receipts.
Some accountants declared that “280E was dead” for small cannabis businesses – and the Treasury Inspector General for Tax Administration took notice.
In January 2021, the IRS passed another regulation stating that anyone subject to 280E – namely, marijuana businesses – can’t use 471(c) to reduce the impact of 280E.
But some believe the IRS “overstepped,” according to Botillier.
“Fortunately, for businesses subject to 280E, the IRS does not write the tax code; Congress does,” he said.
To Richards, 471(c) can still be used by small cannabis businesses because it allows taxpayers to add ordinary and necessary business expenses – such as payroll – to COGS.
Mitigating risks
Richards said he has seen clients use 471(c) also get audited by the IRS, but, in each case, the tax agency issued “no change” letters, meaning there were no penalties issued or corrections made.
That said, Botillier warned that accountants must make correct inventory elections, include the proper disclosures and should never attempt to write off all overhead expenses to avoid 280E entirely.
“We do not recommend kicking the hornet’s nest,” he said.
Accuracy is key to disputing a tax position with the IRS, he said, so maintaining good books and records that reflect the company’s use of the 471(c) inventory methodology is essential.
Botillier also advised that accountants in the marijuana space ensure there’s a narrative for justifying the use of 471(c) – and that narrative cannot be because you’re trying to get out of 280E.
“Instead, the reason we use 471(c) is to simplify our inventory-reporting process, to avoid the complicated allocation methods we used to use prior to 471(c),” he said.
Botillier said it’s up to accountants to decide how aggressive or conservative they want to be.
“One thing is for sure,” he told MJBizDaily via email.
“Doing nothing to mitigate 280E is a mistake and very costly.”
Source: https://mjbizdaily.com/small-marijuana-businesses-take-advantage-of-purported-280e-loophole/
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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