Cannabis businesses are used to facing opposition and resistance, but their biggest adversary may be the Internal Revenue Service; in particular, section 280E of the Internal Revenue Code.
But attorney James Thorburn is no stranger to fighting the IRS on 280E. His cases have the potential for changing the course of cannabis business tax rates. His firm, Thorburn Walker LLC, located in Colorado, is challenging the IRS’s implementation of 280E in the cases of Feinberg v. Commissioner of Internal Revenue, and Boulder Alternative Care LLC v. Commissioner of Internal Revenue. In another case, Alpenglow Botanicals LLC v. United States of America, the dispensary is seeking refunds from tax bills that have been levied and paid.
The dispensaries are also asking the courts to vacate the IRS’ rejection of deductions for reasonable and necessary business expenses that they attempted to use.
In each case, Thorburn and his partner, Richard Walker, challenge the IRS’s authority to apply 280E based on various legal theories. At the time of publication, all of the cases have yet to be decided, but each case has the potential to make national policy and ultimately be appealed all the way to the U.S. Supreme Court.
Section 280E prevents a cannabis business from being able to deduct what are considered “reasonable or necessary” business expenses. These usually include deductions for items like rent, insurance, utilities, supplies, licenses, depreciation or repairs, among other items. Average businesses are permitted to take those deductions and lower their taxable income at a rate of around 35%-40%, which helps owners earn a profit after paying their taxes. Thorburn’s firm has found that cannabis businesses have a tax rate of around 100% or higher, due to the enforcement of 280E.
“If a potential employer were to come to you and say, ‘I will pay you $60,000 a year in salary, but your taxes would be $80,000,’ would you take that job?” Thorburn asked. “How can people live under this situation? Cannabis businesses aren’t complaining that the taxes are heavy; these taxes are so severe that they cannot survive.”
The only permissible tax deduction is the cost of goods sold, which can vary depending on the type of business. With only this being deductible, “the tax scheme becomes so invasive that a business cannot survive,” he said. “The type of tax rates it creates will put a lawful business out of business.”
So how do current businesses seem to flourish during a time with such an oppressive tax rate? “The IRS is only now dealing with audits from the tax year of 2012-2014, so many are able to stay ahead of the tax bill that they owe because the business is currently seeing a great amount of growth in the 2016 business year.”
Currently, the best thing for a business to do is to pair up with a knowledgeable tax attorney or CPA who truly understands 280E. How the business and its tax attorney choose to take (or not take) certain deductions will present different degrees of risk to a company. In addition to knowing the best way to file taxes for your company, a tax attorney can keep owners from making damaging and possibly incriminating statements or admissions in tax filings, audits or tax cases that could be used in a criminal proceeding at a later time. Also, the current non-prosecution policy of the Department of Justice could easily change with a different administration or attorney general.
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