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Is Your Cannabis Management Company a Ticking Time-Bomb?

by Brian S. Whalen, CPA December 27, 2018
Estimated Reading Time: 2 minutes

 

Do you have a cannabis “management” company which is doing either of these things:

  1. Making transactions for the benefit of your licensed cannabis company to reduce taxes under § 280E.
  2. Being used to get around the inability to have a bank account in your cannabis company’s name.

If you answered yes to either, you may be committing FRAUD, LAUNDERING MONEY, and in danger of being DENIED DEDUCTIONS TWICE under § 280E!

“Whaaaaattt?” you say, “but my attorney said…”

Drug trafficking is generally defined as knowingly being in possession, manufacturing, selling, purchasing, or delivering an illegal, controlled substance.  Cannabis is a Schedule I controlled substance.  If your management company participates in any activity that can be considered “trafficking in controlled substances”, then you don’t have the option of allocating expenses between marijuana-related and non-marijuana related activities.

…this may apply to you if you are using your management company to get a bank account that you couldn’t otherwise obtain (FRAUD?) …

Not only is a management company that is trafficking doing so as a non-licensed cannabis company under state laws, but it is also inseparable from the licensed cannabis company and subject to § 280E under federal laws.  The IRS can step in and you may be denied the same deduction twice – once in your “management company”, and once in your cannabis company.  A December 20th, 2018 Tax Court case sets precedent on this issue, Alternative Health Care Advocates vs. Commissioner of the IRS

Furthermore, if you are concealing the transformation of profits from illegal activities into seemingly “legitimate” assets, well, that is pretty much the definition of MONEY LAUNDERING.  Yup, this may apply to you if you are using your management company to get a bank account that you couldn’t otherwise obtain (FRAUD?) and use it to pay for cannabis-related expenses.  If you are leasing real estate or property you own to a cannabis company that you are participating in and deducting depreciation, taxes, etc., this may be seen as an attempt to skirt § 280E and result in disallowed deductions.

RELATED:  Cannabis CEOs: Be Aware of this IRS Audit Guide

It seems there is a ton of bad information circulating to this day (particularly in California) that originated from attorneys and accountants who are ill-informed.  Some who “specialize in cannabis”.  These time-bombs are now exploding as more and more cannabis companies have been operating long enough to be audited by the state and IRS.  Back taxes, fines, and penalties are the result.

Don’t be a time-bomb.  Do your taxes right in 2019!

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