The Internal Revenue Service is reportedly trying to prove that marijuana businesses have been illegally trafficking in weed and aren't entitled to the tax deductions they have been claiming, several sources have reported.
In its latest effort, the IRS filed a series of summonses that granted it access to Colorado’s seed-to-sale cannabis tracking system, with the expectation of finding evidence of these businesses claiming deductions on profits derived from the sale of pot — which remains federally illegal and a DEA Schedule 1 drug.
In response to these moves, several cannabis entrepreneurs have filed petitions in U.S. District Court to stop the IRS from obtaining state data related to these businesses' sales and production. Many of these impresarios argue that the nature of this investigation is not tax-related, but criminal instead; if this were the case, the IRS would be overstepping its scope of action, and going against the Cole Memo, which stipulates the federal government will not allocate assets to prosecuting state-legal, compliant cannabis businesses. Judges have ruled in favor of the IRS so far.
In an effort to better understand what’s been going on and what it means for the legal cannabis industry, Benzinga decided to reach out to a few companies in the space.
Overcoming These Challenges
Geoff Doran, co-founder of Tradiv, a company providing an online cannabis wholesale platform, called for the state of Colorado “to recognize that this is an intrusion in its affairs and step up to protect the businesses it is allowing to operate within its borders."
“If fighting the IRS is daunting, even for the state of Colorado, perhaps creating a coalition of states with legal cannabis could generate enough leverage to push back the feds," Druan said. "It’s really just going to take some creative thinking and legal teams beyond the resources of individual businesses to overcome these challenges."
Micah Tapman, managing director of Canopy Boulder, a venture fund and business accelerator for companies developing ancillary products and services for the legal marijuana industry, said that due to the complexities created by conflicting federal and state laws, the industry will probably experience “particularly tight tax enforcement from the IRS for the foreseeable future.”
While it's true that a tax audit is never a desirable thing for a business, organizations in every sector of the economy should be prepared for one, Tapman said.
“Cannabis-related hypocrisy makes paying taxes particularly challenging," Tapman explained, "as general and administrative expenses can't be deducted and this leads some business owners to take particularly risky steps to minimize their tax burden, which in turn creates additional areas for the IRS to review and challenge. This negative cycle isn't going away until the tax law is changed or the federal government legalizes cannabis.”
In the meantime, cannabis businesses will have to work extra hard to comply with every law applicable, including tax laws.
“Given this overall situation, it's critical that business owners recognize the risk of violating tax laws and do their best to not only stay compliant but also survive an audit without undue hardship. Understanding that the IRS can and will use all available resources to validate revenues and expenses is part of being a professional entrepreneur, just like making sure your insurance is up to date or reviewing a new lease for unexpected pitfalls,” Tapman said. He mentioned “some great companies now working to help cannabis-related firms stay on the right side of laws and regulations,” like Wurk, Compliant Cannabis, LoudCloud, Yobi, Simplifya, Park Pointe Financial and Modus Law.
“Professional insights from third parties can mean the difference in not just surviving an audit, but making sure it doesn't disrupt your business,” he said.
More From Benzinga:
Image Credit: Javier Hasse
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on Bankrate.com. The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.
All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the Bankrate.com rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.
Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.
Rate collection and criteria: Click here for more information on rate collection and criteria.