cannabis taxation - optimized business structures

OptimizedBusinessStructures:Non-Profit,For-Profit&280e

BOBCARP,ESQ.RCARP@POST.HARVARD.EDU

SETTINGUPSAFELY

Whetherfor-profitornon-profit,followingkeyrulesprotectsyoufrom:

- Personallawsuits- Damages- TheIRS

- Othergovernmentagencies

CorporateStructureisYourFirstDefense

A. IFDONEINCORRECTLY,ITCOULDCOSTYOUEVERYTHINGINCLUDINGTHEROOFOVERYOURHEAD.

B.DONOTUSEABOILERPLATEINCORPORATIONKITORDOWNLOADSOMEONEELSE’SBYLAWS

C. Onesizedoesnotfitall

CorporateStructureisYourFirstDefense(con’t)

Issuestoworryabout:

-Indemnification-Assetprotection-Personalprotection-Taxes,lawsuits,confiscationofproperty,arrest

ObserveCorporateFormalities

#1.Buycorporatekit

- Notforstockcertificates(non-profitsdon’thavestock)

- Mainlyforcorporateminutes&bylawsregister

ReducingtheTaxBite

REMEMBER:COGSandproperclassifyingofexpenses

HOWYOU’REGOINGTOGETALUNCHDATEWITHTHEIRS

- Don’tmixmoneywithoutIOUs- Don’tusebankaccountforpersonalbills

- Don’twritechecksw/ocorrespondinginvoice- Don’tlinkbankaccounts!

- Ifyouhavemultiplecompanies,writechecks toeachotherandkeepaledger

CostofGoodsSold– MakeitBulletproof

Dealingwiththedreaded280eTheTwo-BusinessRuleTaxpayercanhavemorethanonetradeorbusinessAlverson v.CommissionerRegulations provide standards to determinewhetheractivities constitute separate businesses

Reg.§ 1.183–1(d)(1)42

CostofGoodsSold(con’t)

FullAbsorptionInventoryCostMethodSection471Taxpayer’smustincludeasinventoriable costsalldirectandindirectproductioncosts.ContinuingunderSection263A,UNICAPrulesrequireproducerofinventorytoincludeinthecostsofitsinventorydirectcostsofsuchproperty’spropershareofthoseindirectcostspartorallofwhichareallocabletosuchproperty.

Let’sSticktotheEasyOnes

Tocreatemorejustifiableexpenses&solidaudittrail:A. Dispensaryemployeesshoulddispenseforfree,but

educateforasalaryB. DispensariesshouldhaveanothermethodofcostingC. Everyemployeeshouldhavenon-marijuanarelated

jobdescriptionalongwithrealjobdutiesD. Anynon-COGSexpenseshouldbereworkedand

reclassified

WHYDOYOUNEEDTWOLLC’SANDACCORP?

A. Oneentityistheactualcannabisenterpriseholdingthelicense.

B. Theotherentityisthemanagementcompanyprovidinggoodsandservicestothecannabisenterprise.

C. Managementcompanymarksupthegoods&services,creatingahigherCOGS

D. Thethirdistoholdtheshareofthemanagementcompany.E. Lookup:Sec.1202SmallBusinessStockCapitalGains

Exclusion

TheTwo-BusinessRule

qCAUTION:Itmustbealegitimatebusinesstoclaimthedeductions,i.e.itshouldhaveitsownsetofbooks,itsowncorporatestructure,andarealrevenue/expensestream

CORPORATESTRUCTURE

WHICHONEISBEST?a. OperateasanIndividualb. Partnershipc. SCorporationd. LLCe. CCorpf. SCorp

TheTaxDilemma– 280E

Lastyear,44%ofcannabis-basedcompanieswentoutofbusiness

Mostfrequentreason?280E

280EDefined

- Involvesexpendituresinconnectionwiththeillegalsaleofdrugs

- Nodeductionorcreditshallbeallowed…incarryingonanytradeorbusinessifsuchtradeorbusiness(ortheactivitieswhichcomprisesuchtradeorbusiness)consistsoftraffickingincontrolledsubstances.

- THAT’STHEWHOLESTATUTE!

280EDefined(cont’d)

• CannabisisconsideredaSchedule1drug

• Thismeansnomedicaluse

• Consideredasdangerousasheroin

Inanutshell:NOBUSINESSDEDUCTIONSAREALLOWEDONYOURTAXES!

WHICHCANNABISBUSINESSESAREHITTHEHARDESTBY280E?

“IFYOUTOUCHTHEFLOWER,THEGOVERNMENTHASTHEPOWER!”

Dispensaries– hardesthitby280E.Growers– Notasbad,theycanattributealmosteverythingtoCOGS

Edibles/MIPS– Deceiving– youthinkthatthesugar,flower,ingredients,etc.areexpensesBUTTHEYARENOT.(“ortheactivitieswhichcomprisesuchtradeorbusiness”)asstatedin280Emeansyouhavetocapitalizethem

andnotexpensethem.TestingLabs– noworries.Theyarenot“trafficking”incannabis.

EXAMPLENormalBusiness:

Income:$1,000,000CostofGoodsSold:$500,000Rent:$100,000Payroll:$100,000AdministrativeExpenses:$100,000

Expectednetincomebeforetaxes:$200,000

EXAMPLE(CONT’D)Marijuanabusiness

Income:$1,000,000CostofGoodsSold:$500,000Rent:$100,000Payroll:$100,000AdministrativeExpenses:$100,000

Expectednetincomebeforetaxes:$200,000,right?

WRONG!

- Youcan’tdeductANYoftheordinaryexpensesofcarryingonabusiness,likerent,payroll,etc.

- Taxeswouldbebasedonnetincomeof$500Kinsteadof$200K=highertaxburden

INSUM….

Worried?YouShouldBe!

§ Howyousetupyourbookkeepingwilldetermineifyousurvive

§ OnlyADJUSTMENT(notdeduction)allowedisforCOGS

HOWYOUCANGETAROUNDTHIS?

ANSWER:AMANAGEMENTCOMPANY

HOWYOUCANGETAROUNDTHIS?

ANSWER:THREECOMPANIES

1. LLCOWNSTHELICENSE2. SECONDLLCISTHEMANAGEMENTCOMPANY3. C.CORPOWNSTHESHARESOFTHE

MANAGEMENTCOMPANY

HOWITWORKS

qManagementagreementtiesthemanagementcompanytothecannabisenterprise

q Bychargingmarkuponcapitalloanedtothecompany,providinggoods,services,etc.,youcangenerallycreateanextra10-18%hikeinCOGS

HOWITWORKS(CONT’D)

q Don’tletCOGSgohigherthan80-85%- thisisanautomaticaudittrigger

q IRSwillallowyoutocreateaformulaforcapitalizingCOGSandadjustingincome(it’snotadeduction)onyourtaxreturn

AUDITTIMEvExpecttobeauditedwithinfirstthreeyearsyou’reinbusiness

vCostaccounting,receiptsanddocumentationwilleithersaveyouordrownyou

vCostaccountingiscritical– allowsyoutojustifyyourCOGS

vSpeaktoaccountantortaxlawyerfamiliarwithcannabisenterprisestocreateyourchartofaccounts

AUDITQUESITON

If&WhenYouAreAudited,WhoistheProperPersontoRepresentMe,MyAccountantorMyLawyer?

ANSWER:YOURLAWYER

• Lawyersmaintainprivilegeovertheirclientsdocuments

• Accountantscanhavetheirworkpapers,taxcalculations,etc.subpoenaedbytheIRS

• ThiscanprovidetheIRSwithsufficientinformationtochargeyoubothcriminally&civilly

THETWOBUSINESSRULE

TWOBUSINESSRULEq Cannabisbusinesscansharesamespacewith

anotherbusinessthatis“legitimate,”andtakedeductionsforit

q Example:o Dispensarycanalsohostnutritioncounseling,patient

advocacy,caregivingservices,undersameroofo Thespaceused,electricity,personnel,etc.canbededucted

bythelegitimatebusiness

TAXTIPSCreateaformula…

q Consultyouraccountantortaxlawyer– nottheeasiestthingtodo,andit’scriticaltoyoursuccess

q Readupon280E– theremaybethingsyouforgottocapitalize

q FigureouthowtorelateanycoststoyourCOGS

THANKYOU!