California Keeping Cannabis Taxes Steady In 2021

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The California Department Of Tax And Fee Administration (CDTFA) which oversees the reporting and collection of taxes for the California cannabis industry under Emergency Regulation 3700 established a new category and tax rate for the cannabis cultivation tax that took effect January 1, 2018, along with the other existing cultivation tax rates. Every six months the CDTFA re-determines the cannabis markup rate. An analysis of statewide market data is used to determine the average mark-up rate between the wholesale cost and the retail selling price of cannabis and cannabis products. The CDTFA set the mark-up rate at 80% starting, January 1, 2020, and the CDTFA announced on May 13, 2020 that the mark-up rate for the last six months of 2020 shall remain unchanged at 80%.

Governor Newsom Signs AB 1872 Insuring No Tax Increases In 2021

On September 18, 2020 California Governor Gavin Newsom signed Assembly Bill 1872 (Committee on Budget). Specifically, AB 1872 suspends for one year, beginning January 1, 2021, the CDTFA’s authority to raise the cannabis cultivation tax and the wholesale mark-up rate for purposes of calculating the excise tax. Considering the fact that cannabis businesses don’t qualify for federal relief like other businesses have been able to secure during the COVID-19 pandemic, this tax relief should be welcomed by the industry.

Cannabis Excise Tax

The 15% cannabis excise tax is based on the average market price of the cannabis or cannabis products sold in a retail sale. The mark-up rate is used when calculating the average market price to determine the cannabis excise tax due in an arm’s length transaction. In an arm’s length transaction, the average market price is the retailer’s wholesale cost of the cannabis or cannabis products plus, the mark-up rate determined by the CDTFA. In a non-arm’s length transaction, the average market price is the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.

Cannabis Cultivation Tax

As required by the Cannabis Tax Law, effective January 1, 2020, the cultivation tax rates reflect an adjustment for inflation. The adjusted rates for each category shown below will be reflected on the monthly and quarterly cannabis tax returns beginning January 1, 2020.

Cannabis Category 2021 Rate [follows 2020] 2020 Rate
Flower per dry-weight ounce $9.65 $9.65
Leaves per dry-weight ounce $2.87 $2.87
Fresh cannabis plant per ounce $1.35 $1.35

 

  • The 2020 rates apply to cannabis that a cultivator sells or transfers to a manufacturer or distributor on or after January 1, 2020.
  • All fresh cannabis plants must be weighed within two hours of harvesting.

 

If you are a cannabis retailer, you are required to collect the cannabis excise tax from your customers on each retail sale of cannabis or cannabis products starting January 1, 2018, and pay the excise tax to a distributor. Distributors are liable for paying the cannabis taxes to the CDTFA.

Invoice Requirements

Retailers are required to provide purchasers with a receipt or other similar document that includes the following statement – “The cannabis excise taxes are included in the total amount of this invoice.”

Recordkeeping

Every sale or transport of cannabis or cannabis products must be recorded on an invoice or receipt. Cannabis licensees are required to keep invoices for a minimum of seven years.

Distributors (or in some cases manufacturers) are responsible for collecting the cannabis cultivation and excise taxes, and the invoices they provide must include, among other specified requirements, the amount of tax collected.

Retailers, cultivators, and manufacturers must keep these invoices as verification that the appropriate tax was paid.

How This Impacts The Black Market

Legal California cannabis businesses have been complaining about taxes, which in parts of the state are among the highest in the nation. Many believe that these taxes on compliant cannabis operators while still mandating compliance with State and local regulations will widen the price disparity gap between cannabis products sold in the black market vs. cannabis products sold in the legal market. But with the State stepping up its enforcement efforts to uncover and prosecute illegal cannabis operators, the State is hoping to eliminate this discrepancy by eradicating non-compliant operators.

What Should You Do?

Start your cannabis business on the right track.  Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

Are You Affected By The Summer 2020 Oregon Wildfires? IRS Is Providing You With Tax Relief And Extending Upcoming Tax Deadlines.

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The IRS announced on September 17, 2020 that victims of the Oregon wildfires that began September 7 may qualify for tax relief.  Individuals who reside or have a business in Clackamas, Douglas, Jackson, Klamath, Lane, Lincoln, Linn and Marion counties in Oregon, have until January 15, 2021, to file certain individual and business tax returns and make certain tax payments.  Taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief. The current list of eligible localities is available on the disaster relief page on IRS.gov.  Similar relief was announced by the IRS on August 24, 2020 for certain California taxpayers affected by the California wildfires.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after September 7, 2020, are granted additional time to file through January 15, 2021. This includes 2019 individual income tax returns that have a valid extension through October 15, 2020, and the employment and excise tax returns due on November 2, 2020.  It also includes the quarterly estimated individual income tax payment due on September 15, 2020.  It also applies to tax-exempt organizations, operating on a calendar-year basis that had a valid extension due to run out on November 16, 2020. Businesses with extensions also have the additional time including, among others, calendar-year corporations whose 2019 extensions run out on October 15, 2020.

In addition, penalties on payroll and excise tax deposits due on or after September 7, 2020, and before September 22, 2020, will be abated as long as the deposits were made by September 22, 2020.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Releases Tax Guidance For Cannabis Industry

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The Internal Revenue Service released updated guidance on tax policy for the cannabis industry.  The new guidance briefly covers the rules for income reporting, cash payment options, estimating tax payments and keeping financial records.

Under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.  Although cannabis remains federally illegal, taxpayers in this business activity must still report this income and still have an obligation to pay taxes and properly report transactions.

The IRS guidance states “A key component in promoting the highest degree of voluntary compliance on the part of taxpayers is helping them understand and meet their tax responsibilities while also enforcing the law with integrity and fairness to all.”

This update appears to be in response to a Treasury Department report that was released in April 2020 where the Treasury Department’s Inspector General For Tax Administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”

Cannabis Businesses Face Higher Taxes

A topic of interest to the cannabis industry is that it is largely deprived of tax benefits extended to businesses in other industries. Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance.

  • 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income. The IRS guidance acknowledges that “taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.” However, the guidance affirms that “a marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471.”

What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Cannabis Businesses Face Reporting Of Cash Payments

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Northern California (San Francisco Bay Area and Sacramento) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Election 2020: States Voting On Cannabis Legalization This November

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This year, voters in five states (Arizona, Mississippi, Montana, New Jersey and South Dakota) will decide whether to adopt either new medical or recreational cannabis laws with South Dakota looking to legalize both medical and recreational cannabis.  Arizona, Montana and New Jersey are looking to expand legalization to recreational use.  Mississippi is looking to legalize medical use.

The Growing Trend In Legalizing Cannabis.

Medical marijuana is legal in 33 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 33 states and Washington DC. Those 33 states being Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Maine, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 11 states.

Eleven states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those eleven states being Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington and the territory of Guam.

Conflict With Federal Law.

Under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen whether the Federal government will respond favorably and when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

9 Million Non-filers To Receive Letter From The IRS Urging Them To Claim The Economic Impact Payment

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9 Million Non-filers To Receive Letter From The IRS Urging Them To Claim The Economic Impact Payment

What To Do If You Have Not Received Your Economic Impact Payment.

On March 27, 2020 President Trump signed the $2 trillion Stimulus Bill formally known as the Coronavirus Aid, Relief and Economic Security [CARES] Act (the “CARES Act”) to provide assistance to workplaces and employees. The CARES Act provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions.  One of the most publicized provisions is the immediate cash payments by the Federal government to qualifying taxpayers.

Who is eligible for the economic impact payment?

To get cash assistance promptly delivered to individual taxpayers, qualifying taxpayers will receive one-time cash payments of $1,200 for individual taxpayers or if married, $2,400 for married couples.  An additional $500 may be paid for each qualifying child.

These amounts are subject to reduction if the individual’s Adjusted Gross Income (AGI) exceeds $75,000 for an individual taxpayer; $112,500 for head of household; or $150,000 for a married couple.

Nonresident alien individuals and a person who is the dependent of another are ineligible to receive the payment.

For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

By accessing taxpayers’ 2018 and 2019 tax returns along with information received from taxpayer’s using the IRS Non-Filers: Enter Payment Info Tool, more than 160 million Americans have already received their Economic Impact Payments.

Non-Filers Can Still Get A Payment But Must Act By October 15th.

The IRS will start mailing letters to roughly 9 million Americans who typically don’t file federal income tax returns who may be eligible for, but have not registered to claim, an Economic Impact Payment.

The letter, officially known as IRS Notice 1444-A, is written in English and Spanish and includes information on eligibility criteria and how eligible recipients can claim an Economic Impact Payment on IRS.gov. The mailing, which will begin around September 24th, will be delivered from an IRS address.

This letter urges eligible individuals to register by October 15th for a payment by using the IRS Non-Filers: Enter Payment Info Tool, available on IRS.gov. More than 7 million people have used the Non-Filers tool so far to register for a payment.

People can also wait until next year and claim it as a credit on their 2020 federal income tax return by filing in 2021; but for anyone that is required to file either a 2018 or 2019 tax return, they should file the outstanding tax return(s) instead of using the Non-Filers tool.

Affected taxpayers can check the status of their economic impact payment by using the Get My Payment Tool, available on IRS.gov.

An Opportunity For Taxpayers Who Owe The IRS.

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.

Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2020, taxpayers who expect to owe for 2019 should have their 2019 income tax returns done now so that the 2019 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2020.

Remember that COVID-19 does not alter the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do.

Also, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized during this period and a taxpayer is not agreeing to extend such, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statute.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

Click here for COVID-19 Tax Relief measures instituted by the IRS in “The IRS People First Initiative” that can benefit you. 

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles (including Long Beach and Ontario) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Were You Affected By Hurricane Laura? IRS Is Providing You With Tax Relief And Extending Upcoming Tax Deadlines.

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Were You Affected By Hurricane Laura? IRS Is Providing You With Tax Relief And Extending Upcoming Tax Deadlines.

The IRS announced on August 31, 2020 that victims of Hurricane Laura starting August 22, 2020 may qualify for tax relief.  Individuals who reside or have a business in Allen, Beauregard, Calcasieu, Cameron, Jefferson Davis and Vernon parishes in Louisiana, have until December 31, 2020, to file certain individual and business tax returns and make certain tax payments.  Taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief. The current list of eligible localities is available on the disaster relief page on IRS.gov.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after August 22, 2020, are granted additional time to file through December 31, 2020. This includes 2019 individual income tax returns that have a valid extension through October 15, 2020, and the employment and excise tax returns due on November 2, 2020.  It also includes the quarterly estimated individual income tax payment due on September 15, 2020.

In addition, penalties on payroll and excise tax deposits due on or after August 22, 2020, and before September 8, 2020, will be abated as long as the deposits were made by September 8, 2020.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Are You Affected By The Summer 2020 California Wildfires? IRS Is Providing You With Tax Relief And Extending Upcoming Tax Deadlines.

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Are You Affected By The Summer 2020 California Wildfires? IRS Is Providing You With Tax Relief And Extending Upcoming Tax Deadlines.

The IRS announced on August 24, 2020 that victims of the California wildfires that began August 14, 2020 may qualify for tax relief.  Individuals who reside or have a business in Lake, Monterey, Napa, San Mateo, Santa Cruz, Solano, Sonoma and Yolo counties in California, have until December 15, 2020, to file certain individual and business tax returns and make certain tax payments.  Taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief. The current list of eligible localities is available on the disaster relief page on IRS.gov.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after August 14, 2020 and before October 16, 2020, are granted additional time to file through December 15, 2020. This includes 2019 individual income tax returns that have a valid extension through October 15, 2020, and the employment and excise tax returns due on October 31, 2020.  It also includes the quarterly estimated individual income tax payment due on September 15, 2020.

In addition, penalties on payroll and excise tax deposits due on or after August 14, 2020, and before August 31, 2020, will be abated as long as the deposits were made by August 31, 2020.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Takes New Steps For 50,000 Spouses To Get “Catch-up” Economic Impact Payments

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IRS Takes New Steps For 50,000 Spouses To Get “Catch-up” Economic Impact Payments

What To Do If Your Economic Impact Payment Is Wrong.

On March 27, 2020 President Trump signed the $2 trillion Stimulus Bill formally known as the Coronavirus Aid, Relief and Economic Security [CARES] Act (the “CARES Act”) to provide assistance to workplaces and employees. The CARES Act provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions.  One of the most publicized provisions is the immediate cash payments by the Federal government to qualifying taxpayers.

Who is eligible for the economic impact payment?

To get cash assistance promptly delivered to individual taxpayers, qualifying taxpayers will receive one-time cash payments of $1,200 for individual taxpayers or if married, $2,400 for married couples.  An additional $500 may be paid for each qualifying child.

These amounts are subject to reduction if the individual’s Adjusted Gross Income (AGI) exceeds $75,000 for an individual taxpayer; $112,500 for head of household; or $150,000 for a married couple.

Nonresident alien individuals and a person who is the dependent of another are ineligible to receive the payment.

For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

So what if your economic impact payment was diverted to pay your spouse’s past-due child support, how do you claim the missing funds?

These catch-up payments are due to be issued in early-to-mid-September 2020. They will be mailed as checks to any eligible spouse who submitted Form 8379, Injured Spouse Allocation, along with their 2019 federal income tax return, or in some cases, their 2018 return. These spouses do not need to take any action to get their money. The IRS will automatically issue the portion of the economic impact payment that was applied to the other spouse’s debt.

The IRS is aware that some individuals did not file a Form 8379, Injured Spouse Allocation, and did not receive their portion of the economic impact payment for the same reason above. These individuals also do not need to take any action and do not need to submit a Form 8379. The IRS does not yet have a timeframe but will automatically issue the portion of the economic impact payment that was applied to the other spouse’s debt at a later date.

Affected taxpayers can check the status of their economic impact payment by using the Get My Payment tool, available on IRS.gov.

An Opportunity For Taxpayers Who Owe The IRS

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.

Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2020, taxpayers who expect to owe for 2019 should have their 2019 income tax returns done now so that the 2019 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2020.

Remember that COVID-19 does not alter the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do.

Also, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized during this period and a taxpayer is not agreeing to extend such, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statute.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

Click here for COVID-19 Tax Relief measures instituted by the IRS in “The IRS People First Initiative” that can benefit you. 

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles (including Long Beach and Ontario) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Inyo County Sheriff’s Department Shuts Down Massive Illegal Cannabis Farms Located In The California Wilderness

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Anyone conducting business in cannabis surely knows that under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. So the risk is apparent that at any time Federal authorities could come and shut you down but don’t think that just because cannabis is legal in California, you do not have to worry about the State.

California law mandates that you can only sell cannabis if you have obtained a license to do so. These licenses being issued by the BCC. If you don’t have a license, then selling cannabis or transporting it in order to sell it is still a crime under H&S Code §11360.

Illegal Cannabis Growing Sites in Inyo County

The Inyo County Sheriff’s Office in Bishop, California announced in a news release on August 20, 2020 that on three separate days (July 24, August 18, and August 19) the Inyo County Sheriff’s Department with assistance from the Drug Enforcement Agency (DEA), U.S. Air Force National Guard Unit, U.S. Forest Service, Bureau of Land Management (BLM), California Department of Fish and Wildlife and the California Department of Justice (DOJ) CAMP Team No. 3 and 4, eradicated 42,306 illegal marijuana plants from three locations off public lands within Inyo County. Authorities estimate the street value to be between $84,612,000 and $169,224,000.

Inyo County is southeast of Yosemite National Park and home to the Owens River Valley. Spanning 10,192 square miles, it is California’s second largest county, after San Bernardino County. About half of that average is within Death Valley National Park.

The Sheriff’s Office stated that cannabis cultivation can cause extreme damage to ecosystems. As part of the illegal cultivation process, growers are responsible for using miles of plastic tubing and diverting water from natural sources for crop irrigation. The use of banned herbicides and pesticides is also common practice. Additionally, cannabis cultivation sites often contain large amounts of trash and create fire hazards in wildland areas. Reclamation will be conducted through BLM and U.S. Forest Service.

Law enforcement officers continue to investigate the grow site. No arrests have been made at this time.

Statewide Commitment To Enforcement

In a previous blog we wrote about Governor Gavin Newsom’s promise made in February 2019 to deploy the California National Guard against marijuana grows in California. Multijurisdictional task forces have long been deployed against marijuana grows in California as we noted in the following blogs:

  • Click here on a raid that occurred in Riverside County.
  • Click here on a raid that occurred in Kern County
  • Click here on a raid that occurred in the City of Santa Rosa in Sonoma County.
  • Click here on a raid that occurred in the City of Carpinteria in Santa Barbara County.
  • Click here on a raid that occurred in Riverside County.
  • Click here on a raid that occurred in the City of Buellton.

Penalties For Selling Cannabis Without A License.

For most defendants, unlicensed sale or transport for sale of cannabis is a misdemeanor punishable by up to six months in county jail and/or a fine of up to $1,000. For defendants under 18, it is an infraction. Also, giving away or transporting for sale up to 28.5 grams of cannabis without a license is an infraction.

But the sale/transport for sale of cannabis without a license to do so is a felony for the following defendants:

  1. Defendants who have a prior conviction for one of a list of particularly serious violent felonies, including murder, sexually violent offenses, sex crimes against a child under 14, or gross vehicular manslaughter while intoxicated, or a sex crime that requires them to register as a sex offender;
  2. Defendants who have two or more prior convictions for H&S Code §11360 sale/transportation of cannabis;
  3. Defendants who knowingly sold, attempted to sell, or offered to sell or furnish cannabis to someone under 18; or
  4. Defendants who imported or attempted or offered to import into California, or transported or attempted/offered to transport out of California for sale, more than 28.5 grams of cannabis or more than four grams of concentrated cannabis.

In any of these scenarios, black market sale or transportation for sale of cannabis under H&S Code §11360 is punishable anywhere from two to four years in jail.

Transporting cannabis without intent to sell it, or giving cannabis away, is not a crime in California so long as BOTH of the following are true:

  1. You transport or give away not more than 28.5 grams of cannabis or eight grams of concentrated cannabis, and
  2. Any people you give cannabis to are 21 years of age or older.

What Should You Do?

You can count on other county governments coordinating resources and making comprehensive strikes on unlicensed and illegal cannabis operations for the safety of the public.

Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging a cannabis tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

U.S. Appeals Court Rejects California Cannabis Business’ Tax Dispute Due To Mailing Mix-Up

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Two California-based cannabis companies had their petition thrown out of appeals court after it was delivered to court a day late by an unapproved delivery service. Organic Cannabis Foundation and Northern California Small Business Assistants (“NCSB”) were challenging a nearly $2 million combined tax bill at the U.S. 9th Circuit Court of Appeals based in San Francisco.

Appealing I.R.C. §280E Audits

Both Organic Cannabis Foundation and NCSB had been audited by the IRS.  The IRS stated that these businesses are subject to Section 280E which doesn’t allow tax deductions related to cannabis because it is still federally prohibited. According to appellate-court documents, Organic Cannabis Foundation owed $1.1 million in taxes and $225,855 in penalties and NCSB owed $531,707 in taxes and $106,341 in penalties.

When the IRS reaches a final decision in an examination, it will issue a Notice Of Deficiency which starts a 90-day period to file a petition with the U.S. Tax Court to appeal such a decision.  For Organic Cannabis Foundation and NCSB, their petition to the Notice Of Deficiency was due to the U.S. Tax Court in Washington DC on April 22, 2015. According to court records, the petition was delivered via FedEx “First Overnight” at 7:35am April 23, 2015.  Having received the petition one day late, the U.S. Tax Court ruled that the petition for a review of the IRS decision lacked jurisdiction because it came after the petition filing deadline.  The taxpayers appealed this verdict to the U.S. 9th Circuit Court of Appeals; however, the Appeals court upheld the Tax Court’s initial verdict.

The “IRS mailbox rule” states that: “If any return, claim, statement, or other document required to be filed…on or before a prescribed date under authority of any provision of the internal revenue laws is, after…such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed,…the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document…is mailed shall be deemed to be the date of delivery…” I.R.C. §7502.

In other words, this IRS mailbox rule confirms that a tax document is timely filed with the IRS even though it is not physically delivered to the IRS in time, as long as it is delivered by an approved delivery service.  Using the U.S. Postal Service at the time was an approved service (and still is).  Although FedEx Priority Overnight and FedEx Standard Overnight were approved by the IRS at that time, court documents state that it wouldn’t be until May 5, 2015, two weeks after the late delivery, that FedEx First Overnight was designated as an approved service.

Since a timely postmark is crucial, filing a petition in the U.S. Tax Court by certified or registered mail with the U.S. Postal Service can provide taxpayers with assurance of a timely filing regardless of when the petition is received by the U.S. Tax Court in Washington DC.

Yes – Cannabis Businesses Have to Report Income To IRS And Pay Taxes!

We previously reported in our blog that the Trump Administration organized a committee of federal agencies from across the government to combat public support for marijuana and cast state legalization measures in a negative light while attempting to portray the drug as a national threat. The IRS appears to be following the agenda of the Trump Administration when it comes to Cannabis and has formed special audit groups that are tasked with conducting cannabis tax audits on medical and recreational cannabis businesses.

While the sale of cannabis is legal in California as well as in a growing number of states, cannabis remains a Schedule 1 narcotic under Federal law, the Controlled Substances Act (“CSA”) 21 U.S.C. § 812. As such businesses in the cannabis industry are not treated like ordinary businesses. Despite state laws allowing cannabis, it remains illegal on a federal level but cannabis businesses are obligated to pay federal income tax on income because I.R.C. §61(a) does not differentiate between income derived from legal sources and income derived from illegal sources.

I.R.C. §280E

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Cannabis, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

IRS Guidance On Cannabis.

The IRS issued a memo to provide guidance to its agents on conducting audits of cannabis businesses addressing whether an IRS agent can require a taxpayer trafficking in a Schedule 1 controlled substance to change its tax accounting to conform to I.R.C. §280E.

Not surprisingly that the IRS ruled that IRS agents have the authority to change a cannabis business’ method of accounting so that pursuant to I.R.C. §280E costs which should not be included in inventory are not included in Costs Of Goods Sold (“COGS”) and remain non-deductible for income tax purposes.

Cannabis Tax Audits & Litigation.

It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits. IRC §280E is at the forefront of all IRS cannabis tax audits and enforcement of §280E could result in unbearable tax liabilities.

Proving deductions to the IRS is a two-step process:

  • First, you must substantiate that you actually paid the expense you are claiming.
    • Second, you must prove that an expense is actually tax deductible.

Step One: Incurred And Paid The Expense.

For example, if you claim a $5,000 purchase expense from a cannabis distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a cannabis business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. For cannabis businesses this is challenging because of the I.R.C. §280E limitation. Recall that under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

A cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS. Working with a cannabis tax attorney can ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses resulting in the lowest possible income tax liability.

In addition to IRS audits, state cannabis audits are also complex and thorough and generally include all taxes specific and nonspecific to the cannabis business. Potentially at risk is the cannabis license that enables the business to operate. State audits will focus on records regarding sales and use tax, excise taxes, and seed-to-sale tracking records.

Now if your cannabis IRS tax audit is not resolved, the results may be challenged and litigated in the U.S. Tax Court or Federal District Court. The U.S. Tax Court has jurisdiction to hear disputes over federal income taxes before final assessment and collections while the Federal District Court generally requires taxpayers to first pay the liability then seek repayment through a refund request.

Tips For Cannabis Tax Return Preparation

Here are some tips for cannabis businesses to follow in the preparation of their 2019 tax returns.

  • Reconcile Your Books Before Closing Your Books. Incomplete books can cause delays and add unnecessary complexities.
  • Utilize A Cannabis Tax Professional. Engage a tax professional who has experience in the cannabis industry. Such a professional would be familiar with the intricacies of IRC Sec. 280E and relevant cases to make the proper presentation on the tax return in a manner that would support the smaller tax liability possible.
  • Justify Your Numbers As If An IRS Audit Is A Certainty. Don’t wait to receive a notice from IRS that the tax return is selected for examination.  That can be one or two years away.  Instead make it a point to put together the backup to you numbers now while everything is fresh. 

What Should You Do?

Ultimately it is the tax risk with IRS that could put any cannabis business “out of business” so you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Northern California (Sacramento and San Francisco) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.  Also, if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.