280E: Taxing Missouri’s marijuana businesses
With a new year and the state’s first legal sales completed, many of Missouri’s cannabis businesses face new questions when reviewing their finances and preparing their taxes this year.
David Smith of Smith Patrick CPA tells Greenway, “Though cannabis businesses are now legal in some state laws, they are still illegal under federal law. This results in a challenging situation for the federal income tax treatment as it relates to federal statute 280E.”
Section 280E allows a cannabis business to deduct expenses related to the cost of goods sold. But unlike traditional business deductions, 280E doesn’t allow for the deduction of selling, general, or administrative expenses.
“Section 280E disallows deductions and credits for amounts paid or incurred in the trade or business of trafficking in controlled substances prohibited by federal law or the law of any state where the trade or business is conducted.”
This creates a unique burden and potential pitfalls that other businesses don’t face.
What to expect when filing in 2021
“In the past year, the IRS has made statements that they will be actively looking at marijuana businesses to ensure proper tax compliance,” Smith continued. “Companies that do not adhere to the 280E regulations can face significant tax adjustments and penalties for willful non-neglect. Neglecting to follow the tax regulations has caused businesses in other states to close and sometimes have even bankrupted the owners.”
With a targeted approach and heightened sensitivity, many marijuana businesses feel vulnerable.
“Lack of knowledgeable advice does not relieve a business from following tax rules. Operators that do not have proper documentation procedures in place will not be able to defend the cost allocations in the event of an audit,” Smith said. “As a result, these businesses need ethical and competent professional tax advice.”
If an audit does uncover underpayments, businesses face additional interest charges, penalties, fines, forfeitures, or even criminal charges.
“In an IRS audit examination, unlike in a criminal case, the burden of proof is on the taxpayer,” Smith says.
How can businesses avoid pitfalls and mitigate their risk?
“Prepare regular financial statements supporting cost allocations. These should be prepared no less than quarterly. Cost allocation methods used should be reasonable, justifiable, and consistent,” Smith explained. “Utilize technology to establish a perpetual data room in order to keep records of all financial transactions. Many accounting systems now allow the accountant to attach digital documents to support each transaction.”
“In the event of an audit, you should be prepared to provide documentation supporting the date, amount, payee, and business purpose of all financial business transactions.”
“As companies grow in size and their financial activity increases, additional resources will be required,” Smith concluded. “Regardless of the size of the operation, all businesses should have competent advisors that can guide them on how to properly track their financial information. Beyond the compliance requirements, businesses should leverage their financial advisors to help them look forward and guide the business toward success.”
What to expect in the future
To ease the burden created by 280E on legal businesses, some states have decoupled from federal law and now permit licensed marijuana businesses to claim ordinary and necessary business expenses and credits on their state taxes.
States that have decoupled from federal law on marijuana-related business include California, Colorado, Hawaii, and Oregon.
In Missouri, two legislators – Rep. Phil Christofanelli, R-St. Peters, and Sen. Denny Hoskins, R-Warrensburg – have introduced bills that aim to decouple Missouri’s income tax regulation from federal law.
“According to our Constitution, Missouri recognizes medical marijuana as a legal and legitimate business,” Hoskins told Greenway. “Deducting business expenses is routine practice for operating a successful, profitable business. However, medical marijuana businesses aren’t currently allowed these deductions, which in effect increases their taxes significantly. SB 436 will bring fairness to all Missouri businesses. Allowing medical marijuana licensees to utilize these deductions like all other Missouri businesses is the right thing to do for Missouri job creators.”
Greenway will continue to track and update SB 436 filed by Hoskins and HB 877 filed by Christofanelli throughout the legislative session.
“Missouri medical cannabis businesses should be treated like any other business in our state,” said Christofanelli. “Day to day expenses should be deductible for state income tax purposes. This bill is necessary to make that happen.”