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Could an Obscure Tax Loophole Have “Dire Consequences” for Cannabis Businesses?

In March, the U.S. Treasury Inspector General for Tax Administration (TIGTA) issued a report with the scintillating title, “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance.”

The report’s contents are as dry you’d expect. But it should serve as a warning: as long as pot remains a Schedule 1 narcotic under federal law, the Treasury Department and Internal Revenue Service pose a major threat to legal cannabis.

In calling for “increased tax compliance efforts,” TIGTA’s report encouraged the IRS (which is part of the Treasury Department) to step up audits of legal cannabis companies. It’s not known to what degree the IRS has done so, but pot lawyers and others in the cannabis industry have been warning for at least a year that more audits are likely.

At issue is a provision in the U.S. tax code, section 280E, which forbids businesses that sell Schedule 1 narcotics from writing off expenses on their income-tax forms, as all other companies are allowed to do. The provision is at the heart of a case involving Harborside, the Oakland-Calif.-based dispensary chain. In 2019, the U.S. Tax Court ruled Harborside liable for $11M in underpaid taxes from 2007-2012, because it had improperly written off expenses. In June, Harborside appealed the case to the U.S. Court of Appeals for the Ninth Circuit.

To Read The Rest Of This Article By Dan Mitchell on WeedWeek

Published: July 30, 2020

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