Top Cannabis News From 8/20-8/26

Hedging One’s Bets Makes Sense and Can Save a Fortune in the Cannabis Tax Arena

By Ken Boiarsky

It should come as no surprise that cannabis businesses pay a disproportionate percentage of federal income tax relative to income — sometimes even as high as 90+% of gross income — in large part because of the draconian, one-sentence provision of §280E in the Internal Revenue Code (IRC) that disallows deductions (other than for the cost of goods sold) for cannabis trade or business expenses (like rent, utilities, and labor) that are allowable for non-cannabis businesses.

The rapidly changing environment and continuing development of the law within the cannabis arena makes predictability somewhat problematic, and because of the significant exposure to penalties and interest, most businesses file their tax returns more conservatively by applying IRC §280E. The purpose here is to suggest a hedge that is not often used, but probably should be.

Section 6511 of the IRC allows three years from the time your federal tax return was filed, or two years from the time the tax was paid (whichever expires later) within which to file a claim for refund. What this means is that you have that time period to “change your mind” about the way you reported things, and that you then have a shot at getting some tax dollars back (with interest). If the IRS grants your claim for refund, so much the better. But if it denies your claim, you have two years within which to bring suit for refund in federal court (IRC §6532). And if the IRS takes no action on your claim, the time period for bringing suit is considerably longer, though there is disagreement as to just how much longer.

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