The first federal sentencing of a legal cannabis business by the IRS is in the books – and it resulted in heavy fines and jail time for a cannabis operator in Oregon.
At the end of September, cannabis business owner Matthew Price was fined $262,776 and must serve seven months jail time for tax crimes. Price pled guilty to failing to file income tax returns on his legal cannabis stores in Portland and Eugene between 2011 - 2014. Despite advice from accounting consultants, Price did not report nearly $1 million in income and used his business money on personal expenses in violation of federal tax regulations.
While it’s clear that Price was purposefully cheating on his income taxes, the cash-rich nature of the cannabis industry makes it easy to slip up and make a mistake. The penalties are the same, unfortunately, whether you’re fraudulent or just negligent. Price’s sentencing indicates that the IRS is not shy about coming down hard on the recreational cannabis businesses. In fact, the IRS audits 10-20% of existing cannabis companies, a much higher number in comparison with other business types.
Be prepared for the IRS to investigate and don’t get sent to jail. Follow these guidelines to make sure you’re staying on the right side of the law when it comes to filing your cannabis income tax.
Know what you can and can’t deduct from your taxes.
One of the things that stands out about Price’s case is that he was prosecuted by the federal tax agency, the IRS. While cannabis is still considered illegal nationwide as a Schedule I drug, that does not preclude cannabis businesses from paying their taxes. It may seem like a grey area, but in reality the federal government taxes cannabis companies like any other business, with the 280e in place to determine what a cannabis business can and can’t deduct.
This means as a cannabis business owner, you are responsible for income tax, employment tax, and more. For more, check out this article on how the 280e regulation affects your cannabis business, as well as our tips to get the most deductions on your cannabis business.
Stay organized throughout the year.
Price was willfully spending his cannabis income on things like a Rolex and a sports car. But what happens if you get to the end of the year and realize some cash may have slipped through the cracks?
If that sounds like your worst nightmare, take the time now to make sure your bookkeeping practices are in order. Many cannabis companies make these common bookkeeping mistakes. Stay on top of your employees, your inventory, and your accounts to minimize the chance of making an error.
Set up a system of checks and balances.
Personal expenses and business expenses can easily get mixed up when you’re dealing with lots of cash. We recommend creating an organizational system to track your tax information, expenses, and even the things you can’t deduct on your tax return. Payroll is one area where some cannabis companies might get tripped up. Keep track of your payroll and wages with a software like Gusto Small Payments processor, and have your employees sign their pay stubs verifying the transaction took place each pay period. If your expenses are ever called into question, have receipts with the vendor signature to back it up!
Work with a cannabis-specific accounting firm.
Price apparently consulted three different CPA firms who told him to keep his business and personal expenses separate. A good CPA firm can do more than give you some basic feedback on your potential for fraud. Make sure the firm you hire has experience working with cannabis regulations and tax compliance issues. Not every CPA will be well-versed in the laws, and you don’t want to leave it up non-industry specific professionals to learn about the industry at your expense.
If you have questions about filing your income tax and being compliant with federal regulations, get in touch with one of our CPAs today.