Advanced Tax Strategies 
​for the Cannabis Industry
 

The complexity of tax law for cannabis businesses and the requirement to adhere to GAAP dictates you need the horse power to protect your interest. Our proactive upfront approach will help ensure you are in compliance. 

EXPERIENCED ATTORNEY

LITIGATION READY

EXPERIENCED CPA

  • GIVE US A CALL: (916) 292-9412.
  • Incorrect classification can result in denial of write-offs and large tax liability.
  • Large tax bill can bankrupt a company and lead to investor lawsuit​.
  • Selection of entity structure to shield you and the investors from tax assessments.
  • We are prepared to represent your interests in a governmental audit.
  • Assistance with Chart of Accounts setup.
  • Tax return review and preparation
  • Review of expense backup. 
  • Deferral of Cultivation Tax.
  • Capitalization of allowable expenses.
  • Assistance with expense and depreciation allocation.
  • Tax liability projections​.
  • Financial projections.
  • Compliance with 280E is a must
  • Tracking capitalized inventory costs in accordance with Tres. Reg 1.471.
  • ​Compliance checks and review of data.
  • Compliance checks of tax deposits.
  • ​Compiled financial statements.
  • Reviewed financial statements.
  • ​Accounting system selection.
  • Compliance with GAAP.

Our Services

Today’s tax laws are complicated.  Whether you’re preparing the return for your business or filing individual taxes, IRS compliance can be overwhelming.  With so many important details to consider, it’s easy to make an error or omit something which could end up as a penalty, fine, or unwanted problem with the IRS. Cannabis businesses have the added complexity of complying with IRC 280 and the preparation of financial statements in accordance with GAAP (See our GAAP Compliance webpage for a more in-depth discussion). Adding to the complexity is that the State of California allows full deduction of expenses for C Corporations but limits the deduction of expenses for other entities.  We offers tax return preparation for:

  • Individual income tax preparation
  • Partnership taxation
  • Corporation taxation
  • S corporation taxation
  • Trust and estates and gift taxation
  • Sales and use tax preparation
  • Payroll tax preparation

How does a Tax Attorney Differ from a CPA?

Both certified public accountants (CPAs) and tax attorneys can provide you with tax support, but a CPA is limited on the scope of the advice they can provide. In the business context there are a number of ways that a CPA or an attorney may need to be involved. They can both help with tax planning to minimize the amount of taxes owed or maximize tax benefits, evaluate the tax implications of particular transactions, and in most instances defend the business in tax controversy matters before the state or IRS. However, CPAs cannot represent clients before the U.S. District Courts. While CPAs may be more cost effective for doing tax return preparation, CPAs cannot advise on the potential liabilities or protections of certain structures and decisions for the company and cannot assist with the legal documentation necessary to effectuate those decisions. For instance, a CPA can tell you that it makes tax sense to switch from an LLC to an S-Corp, but most states prohibit them from preparing the paperwork or advising on the legal implications of the switch. A CPA is not as well versed at legal research or writing briefs. This is a key requirement if you have to go to Tax Court. Tax attorneys understand the finer details of tax law — an extremely valuable skill if you’re ever involved in an IRS action.​ A tax attorney can help resolve many tax-related problems. They negotiate on your behalf and are trained to analyze complicated tax information and formulate a plan for resolving your case. Because tax laws change every year, tax attorneys are also invested in constant learning to stay abreast with all the changes.​

In the event that a person or entity needs to defend itself on a tax-related issue, both tax attorneys and CPAs can prove useful. However, tax attorneys are educated to handle legal challenges and can represent clients in the court system, whether the clients are bringing a case against the IRS or the IRS is investigating them for possible tax crimes. A CPA can help to strengthen a legal case, especially if he or she helped to prepare the tax returns in question. A tax attorney provides the advantage of attorney-client privilege. A CPA only offers attorney-client privilege if acting at the direction of a lawyer to give the client information relevant to the case.​

What is the Difference Between a Tax Lawyer, a Tax Accountant ("CPA") and a Tax Preparer?

Tax Lawyers and Certified Public Accountants

Accounting professionals typically have substantial education and background in accounting. In order to become a certified public accountant, a professional must take an exam that includes a wide range of accounting skills. These include performing audits; preparing financial statements for businesses, government entities, and nonprofits; understanding corporate governance structures; and dealing with various types of business regulation, including not only taxes but also licensure and other requirements. As a result, those CPAs that choose to specialize in tax tend to have a greater background on certain tax issues than the typical tax professional. However, many CPAs specialize in areas other than taxation, and those accountants might therefore not be as capable in handling your tax issues as someone who is not a CPA but does focus on taxes.

What is a Tax Preparer?

Tax preparers concentrate on tax matters but don't necessarily have the same broad educational background that an accountant has. The quality of tax preparers can vary widely, making it useful to consider different categories of preparers. Enrolled agents are eligible to represent taxpayers before the IRS. To become an EA, you have to pass a three-part IRS test covering individual and business tax returns or you have to have experience as an IRS employee. ​​
Your Audit Tax Risk Can go Forward and Backwards
The vast majority of websites discussing licensing and tax exposure emphasize compliance moving forward. The biggest risk is for cannabis businesses that have not properly filed their prior year tax returns or understated their income. Under the California Freedom of Information Act our firm has been able to obtain the names, addresses and the size of operation the licensee intends to operate. If we can get that information so can the IRS. It is imperative you discuss whether you have complied with reporting your income with a Tax Attorney. Many counties and local jurisdictions have given priority to residents and cultivators that can demonstrate they were operating a cannabis cultivation site or business prior to a stated date (usually some time in 2016). Calaveras County required all cultivators that applied for a license to demonstrate they were cultivating before May 31, 2016. Applicants for cultivation in local jurisdictions have to also state the canopy square footage being applied for. Providing such information is a potential admission that you were operating a cannabis business prior to licensing by the State of California starting in January 1, 2018. This disclosure provides the California Franchise Tax Board and the IRS a road map of who to audit and collect back taxes from. THINK ABOUT IT. The last time we looked the Franchise Tax Board and the IRS has not given a "tax holiday" to cannabis businesses that have decided to step forward and get licensed. THE FEDERAL AND STATE TAX EXPOSURE CAN BE MASSIVE.   
Generally, the IRS can include returns filed within the last three years in an audit. If the IRS identifies a substantial error, it will add additional years to the audit. If an audit is not resolved, the IRS may request extending the statute of limitations for assessment tax. The statute of limitations limits the time allowed to assess additional tax. It is generally three years after a return is due or was filed, whichever is later. There is also a statute of limitations for making refunds. Extending the statute gives the taxpayer more time to provide further documentation to support your position; request an appeal if you do not agree with the audit results; or to claim a tax refund or credit. It also gives the IRS time to complete the audit and provides time to process the audit results.

What if you never file a return or file a fraudulent tax return? The statute of limitations never runs out. The IRS has no time limit if you never file a return or if the IRS can prove civil or criminal fraud. Some states have the same three- and six-year statutes as the IRS. But some set their own time clocks, giving themselves even more time to assess extra taxes. In California, for example, the basic tax statute of limitations is four years. However, if the IRS adjusts your federal return, you are obligated to file an amended return in California. If you don't, the California statute of limitation will never runs out.

​Filing a fraudulent return can result in fines up to $250,000 for an individual or $500,000 for a corporation and up to 3 years in jail along with the cost of prosecution for high dollar tax fraud. For lower dollar tax fraud you can face penalties of as much as $5,000 or 100% of the unpaid tax. 

Last year, 2,105 criminal tax convictions were made and 1,810 taxpayers were incarcerated. Although civil penalties are normally assessed, in some cases, a taxpayer could experience criminal charges, fines and jail time. In rare cases, IRS auditors, or Revenue Agents, could report you to the Internal Revenue Service Criminal Investigation Unit. Whenever your case is handed over to the Criminal Investigation Department, other enforcement actions are typically paused. Click on this link for  Related Statutes and Penalties - General Fraud on the IRS website. Common criminal penalties and/or consequences are presented below.
"The vast majority of websites discussing licensing and tax exposure emphasize compliance moving forward. The biggest risk is for cannabis businesses that have not properly filed their prior year tax returns or understated their income. Under the California Freedom of Information Act our firm has been able to obtain the names, addresses and the size of operation the licensee intends to operate. If we can get that information so can the IRS."

The Penalties Can Be Crushing

Failing to File a Tax Return (Not Filing) Penalty or Charge

This is a misdemeanor, and normally civil tax penalties are assessed, instead of criminal. Although unlikely, you could face up to 1 year in jail and $25,000 in fines for each year you failed to file. One thing to note is that you can only face criminal charges for not filing a tax return (with civil penalties there is no time limit) if it was due no more than six years ago. As long as you file before the IRS contacts you, you are in the clear. This charge is more common than the former because the IRS only has to prove that you did not intend to file.

Filing a Fraudulent Return Penalty or Charge

This is a felony, and a form of fraud. This is more common than tax evasion simply and less severe. It carries up to 3 years in prison, and up to $250,000 in fines for individuals and $500,000 for corporations.

Tax Evasion Penalty or Charge

This is a type of criminal felony whereby a taxpayer willfully uses illegal means to conceal or misrepresent financial details in order to evade tax laws and avoid paying taxes. If convicted, tax evasion carries up to 5 years in jail and up to $250,000 in fines for individuals and $500,000 for corporations. This is different than filing a false tax return.

Willfully Failing to Pay Estimated Taxes or Keep Records

This is a misdemeanor, and normally civil tax penalties are assessed, instead of criminal. Although unlikely, you could face up to 1 year in jail and $100,000 in fines for individuals and $200,000 for corporations.