June 24, 2024

280E Updates: How Do Cannabis Companies Deal with Uncertain Tax Positions?

With the news of the impending reschedule, tax relief for cannabis companies is in sight: since IRS tax code 280E only applies to schedule I and II controlled substances, a reschedule to schedule III will remove the application of IRC code section 280E  to cannabis businesses. This will significantly benefit cannabis retailers who currently can only deduct COGS, as protected by the 16th amendment.

But there aren’t just future benefits to anticipate: several large companies, including Trulieve, made headlines recently by successfully filing amended returns to recoup deductions that were disallowed on prior years tax returns.

How can small cannabis businesses benefit from these developments and possibly recoup already paid taxes of their own?

As we head into the October filing season, now is the time to talk with a specialized tax attorney and cannabis CPA to consider the possible approaches to filing your own amended return for 2020-22 as well as filing a 2023 return using several tax strategies currently in place. 

(If you want to learn more about the potential arguments in favor of amended returns, catch the replay of our webinar with cannabis tax attorney, Nick Richards, who explains the 471c method along with other approaches.)

Keep in mind:

-By taking an uncertain tax position, you open yourself up to an audit, which generally happens more than one year but less than two full years after you file. (The statute of limitations is three years, so generally the IRS likes to give themselves a full year for the audit.)

-Until you successfully pass the audit (or the two full years go by), you should not consider any refund money yours to spend. Set it aside in a separate tax account, in case you have to return it with penalties and interest.

-The cannabis companies that are passing IRS audits are the ones who have carefully segregated costs and kept clean records to justify whatever approach they take. An important first step in preparing to take an uncertain tax position is to clean up your accounting.

If you’re planning on filing an amended return, you need to do a cost-benefit analysis. Legal representation won’t be fast or cheap, and you shouldn’t plan on spending any refund money until you know you’ve passed the audit. But if you’re on top of your cash flow management and ride out the audit period, the potential upside could be significant.

Learn more about our virtual CFO services for cannabis businesses or sign up for a free consultation below.

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