California Raising Cannabis Taxes In 2020

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California Raising Cannabis Taxes In 2020

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 was used to determine the average mark-up rate between the wholesale cost and the retail selling price of cannabis and cannabis products. Based on this analysis, effective January 1, 2020, the CDTFA is setting the mark-up rate at 80 percent.

Cannabis Excise Tax

The 15 percent 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

CURRENT RATE

RATE EFFECTIVE 1/1/2020
Flower per dry-weight ounce

$9.25

$9.65
Leaves per dry-weight ounce

$2.75

$2.87
Fresh cannabis plant per ounce

$1.29

$1.35

 

  • On or after January 1, 2020, the rates apply to cannabis that a cultivator sells or transfers to a manufacturer or distributor.
  • Cultivator cannabis sales or transfers made prior to January 1, 2020, will use the current rate listed above.
  • 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

Many believe that the CDTFA’s decision to increase 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 marijuana 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.

Cannabis Legalization Bills

MORE Act Approved By The House Judiciary Committee To End Cannabis Prohibition – If You Can’t Beat Them, Then Join Them!

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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.

 

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

 

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to  $4,000,000 in fines

 

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

 

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically.

 

How things have changed –  

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 10 states. 

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

 

Department Of Justice preferring cannabis legalization. 

Attorney General William Barr stated that he would prefer that Congress enact legislation allowing states to legalize marijuana instead of continuing the current approach under which a growing number of states have ended cannabis prohibition in conflict with federal law.

 

Marijuana Opportunity Reinvestment and Expungement (MORE) Act Approved By The House Judiciary Committee On November 20, 2019

 

The MORE Act (H.R. 3884), sponsored by House Judiciary Committee Chairman Jerrold Nadler (D-New York), would remove cannabis from the Controlled Substances Act (CSA) and set aside funding to begin repairing the damage of the war on drugs, which has been disproportionately waged against communities of color.  Among other things, the MORE Act would also provide for resentencing and expungement of records for people previously convicted of cannabis offenses and would shield immigrants from being denied citizenship status over marijuana.

 

Chairman Nadler issued a press release stating “Our marijuana laws disproportionately harm individuals and communities of color, leading to convictions that damage job prospects, access to housing, and the ability to vote.  Recognizing this, many states have legalized marijuana.  It’s now time for us to remove the criminal prohibitions against marijuana at the federal level. That’s why I introduced the MORE Act, legislation which would assist communities disproportionately impacted by the enforcement of these laws. I am grateful for the leadership of Rep. Barbara Lee and Rep. Blumenauer, as well as other Members of Congress who have helped pave the way for this important measure. I look forward to moving this legislation out of the House Judiciary Committee, making it one step closer to becoming law.”

 

The House Judiciary Committee approved the MORE Act on a bipartisan vote of 24-10.  This marks the first time that a congressional committee has ever passed a bill to remove marijuana from the Controlled Substances Act.  The bill still must go to a vote to the full floor of the House before moving on to the Senate.

 

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen 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.

Keep in mind that a change in the tax law could result only in prospective relief and have no impact on prior tax years.

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. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Santa Barbara County Police Shuts Down Illegal Cannabis Operation

Riverside County Sheriff’s Office Shuts Down Illegal Cannabis Grow Operation Seizing 1,700 Marijuana Plants

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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.

Riverside County Sheriff’s Office Raids Illegal Cannabis Grow Operation.

As reported by the Riverside County Sheriff’s Office, authorities received complaints regarding possible illegal marijuana cultivation occurring within the La Cresta community, Riverside County.

On November 14, 2019, deputies served a search warrant in the 39000 block of Calle De Campareno. Approximately 1700 marijuana plants in various stages of growth were located and collected. In addition, the electrical system within the residence was illegally altered causing a severe fire hazard and theft of utilities. The estimated theft of utilities for the last six months is going to be up words of approximately $60,000. The entire residence was turned into an illegal marijuana cultivation.

While making announcements regarding the service of a search warrant, two female individuals fled out the rear of the residence and were detained.  They were subsequently arrested for maintaining a drug house, illegal marijuana cultivation, and theft of utilities.

Meiyun Zhou, 38-year-old female resident of La Cresta, was arrested and booked into Cois Byrd Detention Center in Murrieta.

Xiao Mei Chen, 22-year-old female resident of Corona, was arrested and booked into Cois Byrd Detention Center in Murrieta.

The investigation is ongoing.

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 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 the cannabis tax attorneys 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.

Why You Don’t Mess With California – A Primer On California Tax Collection Actions

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Why You Don’t Mess With California – A Primer On California Tax Collection Actions.

California is unique in the structure of its tax system. Most States operate under a single tax agency. The Federal government uses a single tax agency called the IRS. But California has three tax agencies! They are the Franchise Tax Board (“FTB”), California Department Of Tax And Fee Administration (“CDTFA”) and the Employment Development Department (“EDD”).

What does FTB cover?

The FTB administers the income tax. This tax applies not only to individuals, but also to sole proprietorships, partnerships, estates, and trusts. In addition, the income “passed through” to individuals by Subchapter S corporations and certain other entities is subject to State Personal Income Taxation. The tax is applied to all sources of income unless specifically excluded, including wages and salaries, interest, dividends, business-related income, and capital gains.

What does CDTFA cover?

The CDTFA administers the Sales and Use Tax. The tax in a specific California location has three parts: the state tax rate, the local tax rate and any district tax rate that may be in effect. Sales and Use Tax is the second largest source of tax revenue in California and is assessed at both the state and local levels.

What does EDD cover?

EDD involves payroll taxes which includes all employer paid taxes, State Income Tax Withholding of employees, State Disability Insurance (“SDI”) Taxes and Unemployment Insurance (“UI”) Taxes.

The California Tax Agencies can go way beyond liens and levies to enforce collection and put pressure on taxpayers.

The FTB publishes Top 500 Delinquent Taxpayers (one list for personal and one for corporate) twice a year in April and October. The FTB is required by law to post this information at least twice annually. California Revenue & Taxation Code § 19195. Since the list’s inception in October 2007, FTB has collected more than $1 billion from delinquent taxpayers through the program.

The FTB will notify each taxpayer by certified mail 30 days before they post their information.

  • As cases are resolved, those taxpayers are removed from the list, reducing the total number of listings from the original 500.
  • Your occupational and professional licenses, including your driver’s license may be suspended under Business and Professions Code §494.5.
  • State agencies will not enter into contracts for the acquisition of goods and services with you under Public Contract Code §10295.4.

The CDTFA has a similar list of the state’s top sales and use tax debtors, which is updated quarterly.

The CDFTA will revoke your seller’s permit. If your seller’s permit is revoked, you cannot sell your goods. Also, as a corporate director, officer, member, manager, or other person having control or supervision of the filing of returns or payments of taxes, you may become personally liable for any unpaid sales and use taxes, interest, and penalties. Such personal liability for any unpaid taxes and interest and penalties on those taxes is triggered upon termination, dissolution, or abandonment of a corporate business or limited liability company, any officer, member, manager, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation or limited liability company in complying with any requirement of this part. Section 6829 of the Revenue and Taxation Code.

The IRS has the Trust Fund Recovery Penalty (also known as the 100-percent penalty). The EDD has something similar referred to as “CUIC 1735”. But CUIC goes way beyond the IRS’ version. Not only does the EDD assert a full 100-percent exposure of the employees tax withholdings AND the employer’s share of payroll taxes to targeted responsible individuals but also a 10% nonabatable assessment penalty (it should be noted that the IRS version is limited only to the employee’s share of FICA and withheld federal income taxes, roughly 60% of the corporate employer’s overall liability). The two key elements of CUIC 1735 are responsibility and willfulness. The EDD must have both elements before they can make the 100% assessment stick. Any officer, major stockholder, or other person in charge of the affairs of the business can be held responsible. Before the assessment can become final, the targeted responsible person must be given notice, an opportunity for an administrative hearing, and an appeal. If the targeted individual loses his or her administrative hearing and appeal, and does not pay within 10 days after assessment, her or she will be penalized a further 10% pursuant to CUIC 1135.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. Federal and State 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 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. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Has A Plan To Crack Down On Crypto Tax Evaders

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IRS Has A Plan To Crack Down On Crypto Tax Evaders

After years of analyzing data from third parties involved in the cryptocurrency exchanges, the IRS announced in a press release on July 26, 2019 that it has started sending letters to cryptocurrency owners advising them to report their cryptocurrency transactions and pay their taxes. More than 10,000 taxpayers have been identified by IRS as being involved in cryptocurrency transactions but who the IRS believes may not have been compliant in reporting these transactions on their tax returns.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Notices Sent To Taxpayers Are The First Step In IRS Enforcement Action

The IRS is using three types of notices to send to more than 10,000 taxpayers by the end of August 2019 – notices 6173, 6174 or 6174-A. All three notices indicate the IRS has information that the taxpayer receiving the notice currently has or has had virtual currency. However, it is Letter 6173 that is most serious as it requires a signature from the recipient under perjury that they are compliant with the U.S. tax code or requiring taxpayers to respond to the IRS and either file delinquent returns for tax years 2013 through 2017 or amend previously filed returns and include the applicable forms or schedules reporting cryptocurrency transactions. If you receive a Letter 6173, it should be a virtual certainty that you will be selected for examination.

If you receive Letter 6173, you should consult with a tax attorney as the submission of a statement signed under penalties of perjury that is false can result in serious consequences including criminal prosecution.

Virtual Currency Is An Ongoing Focus Area For IRS Criminal Investigation.

Last year the IRS announced a Virtual Currency Compliance Campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

The Proposed 2019 Form 1040 Makes It Harder For U.S. Taxpayers To Avoid Non-compliance Or Claim Ignorance.

The IRS has now issued the second early release draft of the 2019 Form 1040, Schedule1, Additional Income and Adjustments to Income, which includes the following checkbox question:

At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?   ◊ Yes            ◊ No

Taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 will now be required to check the appropriate box to answer the virtual currency question. Taxpayers do not need to file Schedule 1 if their answer to this question is NO and they do not have to file Schedule 1 for any other purpose. This requirement is similar to how the IRS includes questions on Schedule B inquiring whether a taxpayer has foreign bank accounts.

Taxpayers who answer “no” and for who the IRS later determines should have answered “yes” could face civil or criminal penalties and it could affect their success in having penalties abated for reasonable cause.

Taxation Of Cryptocurrency

Cryptocurrency transactions are apparently wildly taxable – far more so than investors may think. Although the IRS has not issued much formal guidance, the position of IRS is that any transaction involving virtual currency can trigger a taxable event including air drops and fork transaction as well as conversions or trades from one virtual currency to another virtual currency.

The IRS in 2014 issued Notice 2014-21 stating that it treats crypto currency as property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens all likely have capital gain implications. Likewise, receiving it as compensation or by other means will be ordinary income. This notice has since been supplemented by Revenue Ruling 2019-24 and frequently asked questions (FAQ’s).

Some would think that if bitcoin is property, trades should be tax deferred under the like-kind changes rues of I.R.C. §1031. Under that theory someone who owned Bitcoin could diversify their holdings into Ethereum or Litecoin, and plausibly tell the IRS it created no tax obligations. Unfortunately, the new Tax Cuts & Jobs Act of 2017 does away with that loophole making it clear that “like kind exchanges” which lets people swap an asset for a similar one without triggering a tax obligation are not available for non-real estate assets.

While Bitcoin receives most of the attention these days, it is only one of hundreds of crypto currencies. Everything discussed with regard to bitcoin taxation applies to all crypto currencies.

Here are the basic tax rules followed by IRS on specific crypto currency transactions:

  • Trading crypto currencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
  • Exchanging one crypto currency for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
  • Receiving payments in crypto currency in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
  • Spending crypto currency is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $500. If that coin was then worth $700 and you bought a $700 gift card, there is a $200 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
  • Converting a crypto currency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
  • Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain.
  • Mining crypto currency is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
  • Initial coin offerings including certain forks do not fall under the IRS’s tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.

Given the limited guidance by IRS, there are still tax positions that can be advocated or structured so that taxpayers dealing with crypto currency can defer gains and minimize taxes. That is why it is essential you seek qualified tax counsel.

Penalties For Filing A False Income Tax Return Or Under-reporting Income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

What Should You Do?

The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.

With only several hundred people reporting their crypto gains each year since Bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns. 

And now that like–exchange treatment is prohibited on non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the bitcoin tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.

Florida Tax Return Preparer Found Guilty of Filing False Tax Returns and Theft of Government Funds

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Florida Tax Return Preparer Found Guilty of Filing False Tax Returns and Theft of Government Funds

The U.S. Attorney’s Office for the Southern District Of Florida announced on November 6, 2019 in a press release that Paul Senat, age 39, the owner and operator of American Fast Services & Tax, American Justice Services & Tax and AM & PM Tax Services, located in Palm Beach County, Florida, was convicted by a federal jury for aiding and assisting in the preparation of false tax returns and theft of government funds.

Guilty Verdict.

According to the evidence presented at trial, from at least 2012 to 2016, Senat through his tax preparation business falsified his clients’ returns by reporting fictitious business losses and false education credits in order to fraudulently inflate their refunds.

Senat faces a statutory maximum sentence of 10 years in prison for theft of government funds and three years for each count of aiding and assisting in the preparation of false returns. He also faces a period of supervised release, restitution, forfeiture, and monetary penalties. A sentencing date has been set for January 27, 2020.

IRS announces arrests and indictments after two-week campaign to fight refund fraud and identity theft. 

The Federal District Courts should expect to see more of these cases as the IRS announced on March 20, 2019 the results of a national two-week enforcement and education campaign to combat refund crimes and identity theft that resulted in numerous legal actions against suspected criminals and businesses committing these crimes.

“Identity theft is a pervasive crime and stopping it remains a top priority of the IRS,” said IRS Commissioner Chuck Rettig. “The IRS, with the help of our Security Summit partners, continues to make progress in this area, but we need to continue our significant efforts to protect taxpayers and assist those who have been a victim of identity theft. We are fighting this problem with enhanced systems, smarter technology and the efforts of our dedicated workforce, including Criminal Investigation. We will retain our relentless, vigorous pursuit of those who prey upon others in this arena”.

Working with the Department of Justice Tax Division and U.S. Attorneys around the nation, IRS Criminal Investigation (CI) made 11 arrests, indicted 15 individuals and saw five other individuals or businesses sentenced who perpetrated some type of refund fraud or identity theft scheme.

“Millions of taxpayers put their trust in tax professionals to prepare accurate and lawful returns.

Unfortunately, a few bad apples take advantage of that trust for their own greed and profit,” said Don Fort, Chief of IRS Criminal Investigation. “CI’s special agents are highly skilled at unraveling fraudulent schemes. With our partners in other agencies and the private sector, we are dismantling these crooked enterprises and enforcing our tax laws”.

What Should You Do?

Whether you are a victim of identity theft or the perpetrator of identity theft, it is important that you seek legal counsel as soon as possible to preserve your rights and/or mitigate your losses.  The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California know exactly what to say and how to handle issues with the IRS as well as State Tax Agencies.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Another Cannabis Business Hit Hard By I.R.C. Section 280E In U.S. Tax Court

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I.R.C. § 280E disallows all trade or business expense deductions for a cannabis business even though the cannabis business operates legally under state law. As more “280E Tax Audits” make their way up to the U.S. Tax Court, various creative arguments have been made challenging the constitutionality and legality of § 280E. A recent such case where the U.S. Tax Court issued an opinion is Northern California Small Business Assistants Inc. v. Comm’r, 153 T.C. No. 4 (2019).

Northern California Small Business Assistants Inc.

Northern California Small Business Assistants Inc. (“NCSBA”) is a California medical marijuana dispensary that was selected for audit for the 2012 tax year. The IRS agent in carrying out the mandate of § 280E determined a deficiency of over $1.2 million and applied an accuracy-related penalty of $252,842.

NCSBA petitioned the Tax Court, contending that its operations are legal under California law and presenting three novel arguments. First, NCSBA argued that Code Sec. 280E imposes a gross receipts tax as a penalty in violation of the Eighth Amendment. Second, NCSBA argued that the text of § 280E tracks that of § 162, which allows for all ordinary and necessary business expense deductions, suggesting that § 280E limits only § 162 deductions and permits others – specifically, taxes under § 164 and depreciation under § 167. Finally, NCSBA argued that § 280E refers to “trafficking” and therefore does not apply to marijuana businesses operating legally under state law.

The Tax Court rejected all of NCSBA’s arguments. With respect to NCSBA’s Eighth Amendment argument, the Tax Court ruled that, unlike in other contexts where a financial burden was found to be a penalty, disallowing a deduction from gross income is not a punishment. In the court’s view, § 280E was enacted under Congress’s clear authority to tax gross income and is directed at persons who operate a business in violation of state or federal law.

Next, the Tax Court found that § 280E is not limited to trade or business deductions because the plain language of § 280E states that “no deduction or credit shall be allowed” to businesses that traffic in controlled substances. The court noted that § 261 provides that “no deduction” is allowed for items specified in part IX of subchapter B, and § 280E is in part IX. Similarly, § 161 provides that the deductions in part VI of subchapter B, including the deductions in § 164 and § 167, are allowed subject to the exceptions in part IX. Thus, the court found that, clearly, § 164 and § 167 are limited by the exceptions in part IX, including § 280E.

Finally, the Tax Court rejected NCSBA’s argument that the word “trafficking” in § 280E implied that the statute does not apply to a business operating legally under state law. The court noted that it has rejected that argument in several previous cases and that NCSBA offered no compelling reason to overrule those decisions. The court concluded that its precedent is unambiguous and that Congress, not the courts, would need to carve out an exception in § 280E for businesses that operate legally under state law.

The Anti-Federal U.S. Climate

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law and other states that have legalized cannabis, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back though has no impact on the IRS which will likely start in 2019 to more aggressively target cannabis businesses with audits.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

Generally, businesses can deduct ordinary and necessary business expenses under §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added § 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. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.

This risk should be risk posing the greatest challenge to any cannabis business as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.

What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering the risks of cannabis 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), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Santa Barbara County Police Shuts Down Illegal Cannabis Operation

Kern County Sheriff’s Office Seizes 10 Million Marijuana Plants In 11 Hemp Fields

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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.

Kern County Sheriff’s Office Raids Illegal Cannabis Operation In Arvin

As reported by the Kern County Sheriff’s Office received information about several hemp cultivation sites that were actively cultivating cannabis. The Kern County Sheriff’s Office, with the assistance of California Department of Fish and Wildlife (CDFW), and Federal Bureau of Investigation (FBI), initiated a joint investigation.

On October 25, 2019, a search warrant was executed at eleven different fields in the Arvin area, amounting to over 459 acres of land. Investigators with the Kern County Sheriff’s Office Narcotics units seized and eradicated approximately 10 million marijuana plants. These plants have an estimated value of over $1 billion on the black market.


These illicit marijuana gardens were grown under the guise of legitimate hemp production. The Food and Agricultural Code and Health and Safety Code define industrial hemp has containing less than 0.3% THC content. The research exemption allows for cultivators to grow and possess hemp/cannabis that is over 0.3% THC content, “if that cultivation or possession contributes to the development of types of industrial hemp that will comply with the three-tenths of 1 percent THC limit established in this division.” This provision does not allow the commercial sale of hemp or cannabis that is over this threshold.


Preliminary testing showed the levels of THC in these fields were well over the legal limit for industrial hemp production and were in fact cannabis. The investigation is ongoing.

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 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;
  1. Defendants who have two or more prior convictions for H&S Code §11360 sale/transportation of cannabis; 
  1. Defendants who knowingly sold, attempted to sell, or offered to sell or furnish cannabis to someone under 18; or
  1. 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
  1. 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 the cannabis tax attorneys 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.

What To Look For In Hiring A Cannabis Tax Lawyer

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With the legalization of medical and recreational cannabis in California there has been an increase in inquires to our office by people who are just entering into the cannabis market place or looking to provide services to the cannabis market place or looking to bring an existing cannabis operation into legal compliance. We also have been receiving inquiries from people and businesses who are subject to Federal, State or Local government action including the need for defense of tax evasion charges and money laundering charges.

I.R.C. §280E

Under the Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812, marijuana is classified as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision; and therefore the CSA prohibits the cultivation, possession, and distribution of marijuana. Violations carry criminal implications that include incarceration if convicted.

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.

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.

So Who Are You Going To Call?

Despite the high stakes risk in operating a cannabis business, many new attorneys have entered into the legal cannabis marketplace with mass advertising on the internet offering their services to bring cannabis entrepreneurs into compliance. However, when it is shaping up that the biggest risk in cannabis is dealing with the taxes, who do you call?

Four Things You Should Consider In Making Your List Of Cannabis Tax Attorneys To Call:

  1. When It Comes To Taxes And Business Issues, Only Deal With Cannabis Tax Law Firms. Make sure the company is a cannabis tax law firm and not a general law firm. Cannabis businesses are subject to unfavorable tax provisions and restricted banking provisions which violations carry criminal exposure. Having a cannabis tax attorney as a resource allows all of these issues to be effectively addressed by one firm.
  1. Look At The Cannabis Tax Law Firm’s Practice Area. Check out the firm’s website to determine the cannabis tax attorney’s major practice areas. Do they have information where they talk about new developments by the Federal government, State laws and regulations, local ordinances and other related stuff? Many of them have that in their blog or news area. That way you knew they have some idea and most likely experience in dealing with such cases.
  1. What Access To The Cannabis Tax Attorney Is Being Offered. As most of the stuff can be done via email/phone/mail you do not need to be so focused on where the cannabis tax law firm is located. Instead be focused on securing access to the cannabis tax attorney and that the cannabis tax attorney will be able to access your situation and come up with a plan.
  1. Does The Cannabis Tax Attorney Offer An Initial Strategy Development Session?  While some firms may offer a free initial consultation, you should seek those cannabis tax attorneys who provide an analysis of your situation and communicate a complete strategy in the initial session. Such attorneys will likely charge for that session but the value you get from it should greatly exceed the fee and should allow you to make the right the decision which could save you thousands of dollars and preserve your freedom.

What To Ask The Cannabis Tax Attorney In Your Initial Session?

  • Discuss the situation. Let the attorney know that (a) you did not report income earned your cannabis business and (b) how you have resorted to deal with monetary transactions outside of traditional banking channels. Once you tell that, the attorney should start asking more details. Everything that is discussed should be protected under the attorney-client privilege.
  • The Process.  After hearing your information, the attorney should suggest what he thinks is best in your case and tell you what the process would be like. In your initial session you should let the attorney review any of your relevant documents (i.e., tax returns, financial information, etc.).
  • Charges & Penalty.  Ask the attorney how bad is your situation. Ask how good the chances of you getting cleared from criminal charges are. Ask what can be the maximum penalty and how good are chances of getting penalties waived or reduced. Ask what would be his strategy or reasoning to get relief and minimize your tax burden.
  • Time.  Ask the attorney how long will the entire process take or at least what he expects how long each step or phase could take.
  • Price. Ask the attorney what he would charge for the entire process or at least each step or phase to be pursued. You should find that firms typically charge based on time spent and costs incurred given the many variables involved and sometimes multiple agencies involved. Firms who charge in this manner will usually have different levels of staff whose rates vary based on their level of skill or expertise so you should ask who else would be involved, their rates and impact to the total time charges. Some firms may even offer alternatives that if certain tasks are delegated to you or other third parties such as an accountant, the amount charged by the tax law firm can be less.
  • Experience. Ask the attorney how up to date he is with the most recent changes in cannabis policy on local, state and federal levels and how familiar he is with how various judges, courts and government agencies tend to treat cannabis cases. Check to see that the attorney is Board-Certified In Tax Law. What other credentials does the attorney have – LL.M.(Tax) Degree, C.P.A. License?

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

Considering the tax risks of cannabis 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), the San Francisco Bay Area (including San Jose and Walnut Creek) 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. And if you are involved in crypto currency, check out what a Bitcoin Attorney can do for you.

What You Need To Know To Deduct Charitable Contributions On Your 2019 Income Tax Return

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What You Need To Know To Deduct Charitable Contributions On Your 2019 Income Tax Return

The end of 2019 is coming and so more people are thinking how they can reduced their taxes. The more itemized deductions you can rack up on you individual income tax return, the smaller amount of taxable income you will have which now puts more money in your pocket. Taxpayers who gave money or goods to a charity should be able to claim charitable contributions which get included as an itemized deduction on their 2019 federal tax return.

Here are some important facts you need to know about claiming charitable contributions to save on taxes and withstand an IRS audit.

  1. Qualified Charity. Only donations to qualified charitable organizations are deductible. Do not merely rely on the organization’s website or what the organization may state. If you are questioning whether an organization is qualified, you can check with IRS directly through the IRS website. To check the status of a charity, use the IRS Select Check tool. Keep in mind that religious institutions including churches, synagogues, temples, and mosques are considered “de facto” charitable organizations and are eligible to receive deductible donations even if they are not on the IRS’ website. However, you can never deduct donations to political organizations and candidates. Also, you cannot deduct contributions to specific individuals no matter how deserving or sympathetic to their tragic situation.
  1. You Must Itemize. To deduct donations, you must include these donations as Itemized Deductions on Schedule A of Form 1040. If the total amount of your Itemized Deductions does not exceed the Standard Deduction already given to you by the Federal government, you won’t get any real benefit from making these donations.
  1. Deductible Portion Of Donation May Be Reduced. You can only deduct the amount of your donation that exceeds the fair market value of the benefit received. If you get something in return for your donation, you would have to reduce your deduction by the value you received. Examples of benefits include merchandise, meals and tickets to events.
  1. Property donation. If you give property instead of cash, you can normally only deduct the item’s fair market value. Fair market value is generally the price you would get for the property item on the open market. Donating property that has appreciated in value, like stock, can result in a double benefit. Not only can you deduct the fair market value of the property (so long as you have owned it for at least one year), you will avoid paying capital gains tax.
  1. Donations From Your Retirement Account. Typically, if you want to make a donation from your IRA, you’d have to withdraw those funds, pay the tax and then make the donation. However, IRA owners who are age 70½ or older can transfer up to $100,000 per year to an eligible charity tax-free and the transfer counts toward your required minimum distribution (RMD) for the year. To be an eligible transfer, funds must be transferred directly by the IRA trustee to the charity. Withdrawing the monies first and then writing the check to the charity will not qualify for the non-recognition of income.
  1. Form to File. You would file Form 8283 for all non-cash gifts totaling more than $500 for the year. Keep an itemized list of for donations of non-cash items – do not just state you gave a bag of clothes and expect to substantiate the value of what you gave. Instead be specific, noting the description and condition of the items. You can generally take a deduction for the fair market value of the item which is the price that a willing buyer would pay to a willing seller. If you contribute property worth more than $5,000, you must obtain a written appraisal of the property’s fair market value.
  1. Proof of Donation. If you donated cash or goods of $250 or more, you must have a written statement from the charity. The statement must show:
    • Amount of the donation.
    • Description of any property given.
    • Whether the donor received any goods or services in exchange for the gift.  

For cash donations under $250, you should always have substantiation of payment by a bank record such as a canceled check or credit card receipt, clearly annotated with the name of the charity or in writing from the organization. Even with a statement from the charity, it is still a good idea to retain this evidence of payment.

  1. You Can’t Deduct The Value Of Your Time. While your time is valuable, when you volunteer your time for charities, the IRS does not allow a charitable deduction for the time you spent. However, most out of pocket expenses relating to volunteering are should be deductible so long as they are not reimbursed to you or considered personal. Out of pocket charitable expenses which might be deductible include parking fees and tolls; other travel expenses; uniforms or other related clothing worn as part of your charitable service; and supplies used in the performance of your services. You will need to keep receipts evidencing payment in case you are questioned by the IRS.
  1. Timing Of Contribution. Contributions are deductible in the year the contributions are made so for the 2019 tax year that would had to been no later than December 31, 2019. But that doesn’t necessarily mean that by the 31st the cash payment had to be made out of your account. Contributions made by text message are deductible in the year you send the text message if the contribution is charged to your telephone or wireless account. Contributions made by credit card charges are deductible in the year charged so long as the charge is posted by your credit card company in that tax year. The credit charge itself does not have to be paid off by the end of the tax year it was charged. Similarly, checks which are written and mailed by the end of the year will be deductible for the year written if they are not cashed until the following year. Announcing that you intend to donate assets will not qualify for a deduction in the current tax year until the tax year you make good on the pledge.

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), 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, unreported crypto currency transactions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. If you are involved in cannabis, check out what a cannabis tax attorney can do for you. If you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.