(Editor’s observe: This story is a part of a recurring collection of commentaries from professionals related to the hashish trade. Naomi Granger, CPA, MBA, is the co-founder of Dope CFO.)
Cannabis firms ought to count on an uptick in IRS audits.
A current report by the Treasury Inspector General for Tax Administration places a goal on marijuana.
Companies which have didn’t pay their full federal tax obligations or neglect to keep up clear, well-organized books shall be in for a impolite awakening if the taxman comes visiting.
If the IRS knocks in your door, preparation is essential.
Start getting your home so as with these seven techniques:
1. Don’t bury your head within the sand.
The books and information are all the time the duty of the enterprise proprietor. CEOs can not bury their heads within the sand.
It’s the proprietor who shall be confronted with litigation and held answerable for any again taxes or penalties and probably even jail time if statements are thought-about felony.
Have a high-level understanding of what’s required of you from an accounting and tax standpoint and have checks and balances in place to make sure whomever you are hiring is performing adequately.
2. Are these bills strange and obligatory?
It’s tempting to say deductions on your enterprise bills, however be certain that these purchases actually meet the usual of being ordinary and necessary.
For instance, when making giant purchases, equivalent to an organization automobile, a brand new piece of kit or perhaps a new piece of software program, you could be capable to make a enterprise case for such bills.
An organization automobile supposed to enhance the picture of a dispensary isn’t “necessary” and sure wouldn’t move as a advertising and marketing expense.
However, if your enterprise gives transportation and supply companies and an organization automobile is required, you then’ve handed the “necessary” check.
Then there’s the “ordinary” check. A supply enterprise wouldn’t must buy a Bugatti to carry out these companies. A extra affordable, dependable and fuel-efficient car would move the check over a high-end luxurious model.
3. Substance over type.
The IRS seems to be on the financial substance of a transaction over the authorized type.
For occasion, in the event you had been suggested to arrange a number of authorized entities to get round Section 280E (together with federally authorized businesses equivalent to a administration firm, a payroll agency or a leasing firm) and these entities exist solely to assist your hashish enterprise, the IRS will take into account this as one hashish enterprise and your entire construction shall be topic to 280E, whatever the authorized type.
4. Receipts – or it didn’t occur.
Work together with your accountant to arrange an straightforward receipt- and expense-management system.
Use programs equivalent to Expensify, Hubdoc, and Concur with cell apps so that you simply can take photos of your receipts instantly as you gather them.
In the occasion of an audit, you’re going to need to have the ability to substantiate at a minimal 80% of every profit-and-loss (P&L) line merchandise.
Not having correct assist may open up your enterprise to the danger of the IRS pulling an further yr to audit as a result of your books being incorrect throughout the yr underneath audit.
Bank statements and bank card statements alone are not sufficient.
You will want invoices and receipts for purchases.
Invoices assist the auditors perceive what was bought and when the acquisition was made, and receipts assist auditors affirm that the bill was really paid and there are no additional liabilities related to that buy.
With solely a financial institution assertion, we’re unable to find out if the expense is correctly categorized on the P&L.
Additionally, accrual accounting requires bills to be booked as incurred, and since cost phrases differ from vendor to vendor, a financial institution assertion doesn’t give sufficient details about when an expense was incurred.
Another factor to look out for when utilizing financial institution statements: Be cautious with deposits and transfers. All gadgets that hit the account are thought-about revenue. Proper documentation and the power to substantiate enterprise revenue is a should.
5. Document to recollect.
Not solely do you want assist, however you could additionally doc the accounting therapy. The hashish trade is extremely regulated, and the rules are continuously altering.
A correctly educated accountant understands methods to doc the accounting therapy for these purchases based mostly on the details and circumstances on the time.
The Californians Helping to Alleviate Medical Problems (CHAMP) tax court case in 2007 is an instance of nice accounting, whereas the Alterman case, which was determined in 2018, is an instance of each poor accounting and poor recordkeeping.
IRS audits sometimes come three to 4 years after the actual fact.
It’s very tough to return 4 years and keep in mind why a selected expense was capitalized to stock, when present details and circumstances wouldn’t enable the capitalization of this expense.
6. Time is of the essence.
When working with the IRS, you will want to be cognizant of, and cling to, the deadlines set throughout the audit.
You might want to reply, submit documentation, argue, reply or contest inside these deadlines, as lacking these deadlines may end in you waiving your rights to enchantment.
7. Don’t go it alone.
Ensure you might have a superb lawyer and a tax CPA in place that will help you by the method. Do not attempt to work by the audit with simply your self and a bookkeeper.
The objective is to offer the IRS with all the data requested and to return to an settlement with out taking this to litigation.
Litigation can take years and can be extraordinarily costly, so do issues correctly up entrance to avoid wasting money and time in the long term.
Naomi Granger is cofounder of Dope CFO. She can be reached at [email protected]
The earlier installment of this collection is accessible right here.
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