The sale and distribution of cannabis for recreational or medical use is a powerful economic engine generating billions in annual revenue, with over 40 states and the District of Columbia having some form of legalization of the substance. Despite state relaxation of marijuana prohibition laws, regulated cannabis businesses can be subject to hefty tax assessments and penalties without careful planning. Under Section 61, businesses must report all gross income from whatever source it is derived. However, under Section 280E, cannabis businesses cannot deduct rent, wages, and other expenses unless it is for the cost of goods sold (COGS), resulting in a substantially higher tax rate than other companies on their income. The IRS issued guidance to its agents on conducting audits of cannabis businesses giving IRS agents the authority to change a cannabis business' accounting method. Under Section 280E, certain costs are not included in COGS. Thus, they remain non-deductible for income tax purposes. As more states legalize cannabis and make available licenses to grow, manufacture, distribute, and sell cannabis, the IRS has increased cannabis tax audits, which could result in unbearable tax liabilities.
Federal and select state tax law provisions impacting cannabis businesses Application of tax rules to the cannabis industry and key planning techniques Key issues raised and techniques in handling IRS examinations Effect of Section 280E and deduction of the cost of goods sold
Federal and state tax law issues for cannabis businesses Key planning strategies to minimize tax liability and avoid audits Section 280E Ownership structures Deductions Navigating IRS examinations of cannabis businesses
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