Gray Proctor wrote an article for MJBiz Daily on the hidden audit risks that may arise for cannabis operators who are transitioning their tax filings after the government downgraded medical marijuana’s drug classification from a Schedule I highly restricted controlled substance to a Schedule III medical use classification.
As Gray explains in the article, when cannabis was classified under Schedule I, taxpaying medical marijuana operators had to categorize many expenses under “costs of goods sold” (COGS), because those costs are not covered by IRC 280E. As he states,
280E prohibits “any deduction or credit” to a business trafficking in controlled substances “within the meaning of schedule I and II” on their federal tax returns. The COGS technique was better than nothing but had limitations. COGS does not cover general or administrative expenses. And it could be taken only when the goods were sold, as an offset against gross income.
Now that cannabis is under Schedule III, some operators have begun to transition away from the limits set by 280E, but Gray cautions that operators should stay vigilant about tax compliance and documentation.
For example, the federal reclassification only applies to medical marijuana, not the recreational, or adult-use, sale and use that is legal in many states. In states that allow both medical and recreational use, some sellers house those operations under a single business umbrella. Gray notes, “Until adult-use cannabis is rescheduled, costs that apply to both lines – such as shared payroll, utilities and overhead – must be allocated between them in a defensible way.”
Gray outlines other missteps cannabis operators may make in their tax filings, and warns that “Operators face additional tax, interest, penalties, and even criminal liability for mistakes in transitioning into the new era. That makes it important to proactively minimize any audit risk related to past or current COGS allocations.”
The full article can be found here.
About Gray
Gray is an experienced and accomplished appellate advocate who represents clients facing both civil and criminal tax penalties. He is board-certified as an expert in appellate practice by the Florida Bar Association and accepts cases in a wide variety of disputes in addition to tax.