This document provides an overview and agenda for a presentation on common cannabis tax consequences and how to minimize issues during an IRS audit. It discusses Section 280E which disallows deductions for marijuana businesses, common issues like lack of substantiation, separating business activities, officer compensation, and Form 8300 compliance. Strategies are presented for properly documenting expenses and payments, separating related businesses, establishing reasonable compensation, and avoiding penalties for failing to file Form 8300 for large cash transactions. Sample tax returns and Form 8300 are also included.

1. 248-262-3400
AYARLAW.COM

2. Common Cannabis Tax
Consequences and How to
Minimize and Eliminate Issues at
Audit Time
Presented by: Venar Ayar, J.D., L.L.M. (Taxation)
venar@ayarlaw.com

3. Venar Ayar, Founder
AYAR LAW
Venar Ayar’s expertise is in favorably resolving Federal and
State tax problems. He knows the procedural rules inside and
out, and how things actually work at the IRS.
Feel free to call or email Venar anytime (no charge) and he’ll
be happy to answer any questions you might have.

4. Agenda
1. Overview of §280E
2. Common Income Tax Issues in IRS Audits of Marijuana
Businesses
3. Form 8300 Compliance Issues

5. Overview of Section 280E

6. §280E Background
• Edmundson v. Comm’r, T.C. Memo 1981-623
• Convicted cocaine trafficker was able to claim deductions for his ordinary and necessary
business expenses
• In response, Congress enacted §280E in 1982
• Based on public policy against allowing any benefits to drug dealers

7. Language of §280E
• No deduction or credit shall be allowed for any amount paid or
incurred during the taxable year in carrying on any trade or
business if such trade or business (or the activities which comprise
such trade or business) consists of trafficking in controlled
substances (within the meaning of schedule I and II of the
Controlled Substances Act) which is prohibited by Federal law or
the law of any State in which such trade or business is conducted.
• Cost of Goods Sold not disallowed under §280E
• Not limited to Ordinary Business Expenses
• §199A?

8. Notable Tax Cases
• Californians Helping to Alleviate Medical Problems v. California
(2007)
• Allowed apportioning expenses between separate trades or businesses,
even though one company
• Olive v. Commissioner (2012)
• Differentiated from C.H.A.M.P. – bad recordkeeping, no separate trade or
business
• Treas Reg §1.183-1(d)(1); Schlafer v. Comm’r (1990)
• Tests for defining “activity”

9. Notable Tax Cases (continued)
• Feinberg v. Commissioner (2017)
• Upheld shift in burden to taxpayer re: trafficking determination
• Loughman v. Commissioner (2018)
• Upheld disallowance of shareholder comp expense, even though it results in double
taxation
• Alternative Healthcare Advocates v. Comm’r (2018)
• Upheld disallowance of related management company, results in double tax
• Because Alternative was trafficking, so was related business, acting as its agent, so §280E
applies to both

10. Sample 280E Return (Part 1)

11. Sample 280E Return (Part 2)

12. Sample 280E Return (Part 3)

13. Common Issues faced in
IRS Audits

14. Substantiation Issues
• Deductions are a matter of legislative grace and a taxpayer must
satisfy the specific statutory requirements of the deductions he
claims. Taxpayers bear the burden of proving entitlement to the
deductions they claim.
• Difficulties providing proof of payment via conventional methods
• Keep receipts and log books
• Also, substantiating COGS allocation computations is critical

15. Substantiation Issues (continued)
• Cash-based businesses are closely scrutinized. Lack of
internal controls creates credibility issues
• Lack of Records used as grounds for Accuracy-Related
Penalties
• “Inadequate Records” writeup leads to successive audit

16. “Double Disallowance” Trap
• CHAMP Ruling encourages people to try to separate business
activities to mitigate impact of 280E
• Advanced Healthcare Ruling illustrates the risk of aggressive
planning backfiring
• “Creative” planning ultimately resulted in paying double tax
• To successfully separate businesses, it is important that each
related business provide goods/services to the consumer, to avoid
double-tax issue
• Still have to deal with differentiating from Olive

17. Officer Compensation Issues
• Corporations (both C and S) are required to pay “reasonable
compensation” to officers
• Purpose of rule is generally to make sure SSD / Medicare taxes are
collected
• §280E results in disallowance of officer comp, and doubles up
income tax
• Failure to support amount of “reasonable compensation” will
result in IRS re-writing the paychecks

18. Avoiding Compensation Isues
• Documentation is Key
• Accurately compute officer percentage of time devoted to
business
• Provide basis for numbers (surveys, databases, etc)
• Properly document “shareholder loans”

19. Limiting Personal Exposure
• S Corps, Partnerships, Sole Proprietorships are generally attractive
vehicles for small businesses
• Can take advantage of §199A Deduction (maybe)
• Avoid Double-taxation of C Corps
• Downside is that any adjustments to income flow to individual tax
return
• Disallowance of COGS could bankrupt business owner

20. Limiting Personal Exposure (Continued)
• C-Corps provide limited protection from personal exposure
• Protection only applies to income tax
• Changes to Officer Compensation levels directly impact Individual
Return
• Disallowed business expenses sometimes taxed as dividends

21. FinCEN Form 8300

22. What is Form 8300?
• “Report of Cash Payments Over $10,000 Received in a Trade or
Business”
• Filed with Financial Crimes Enforcement Network (FinCEN)
• Used as a tool to combat money laundering

23. Who Must File?
• Any person in a trade or business who receives more than $10,000
in cash (or cash equivalents) in a single transaction or in related
transactions
• “Person” includes an individual, company, corporation,
partnership, et

24. When to File
• Due date is 15th day after the cash transaction occurred
• Can not wait for accountant to file at end of the year
• In addition to filing Form 8300, must also furnish written
statement to each person whose name is required to be included
on the form. Deadline is January 31 of following year
• Statement must include: contact info for business filing 8300, total
amount of reportable cash, and that the business provided info to IRS

25. Reportable Payments
• Amount is more than $10,000
• Business receives cash as:
• One lump sum of more than $10,000, or
• Installment payments totaling more than $10,000 within 1 year of initial
payment, or
• Previously unreported payments that cause total cash to exceed $10,000
within a 12 month period
• Cash received in ordinary course of business
• Same agent or buyer provides cash
• Business receives cash in one transaction or in related transactions

26. Cash Includes:
• Currency of US or foreign country
• Cashier’s checks, bank drafts, money orders with face value of
$10,000 or less, if:
• received in a designated reporting transaction, or
• any transaction the business knows consumer is trying to avoid 8300 Filing
• Designated Reporting Transaction includes retail sale of any of the
following
• Consumer Durable Good
• Collectible
• Travel or Entertainment

27. Definition of Related Transaction
• Transactions between payer and recipient that occur within 24
hour period
• Transactions more than 24 hours apart where a business has
reason to know that each is a series of connected transactions
• Includes Multiple Payments under a single contract (e.g. a Lease
Agreement, Professional Service Agreement, etc)

28. Penalties for Failing to File
• Non-willful penalties $270 per form not filed
• $3,339,000 maximum aggregate per year ($1,113,000 if gross receipts are
less than $5 million)
• $50 if failure is corrected within 30 days of due date
• $110 if more than 30 days, but before 8/1 of following year
• Intentional failures penalties is $27,820, or the amount of cash
received up to $111,000
• Criminal Penalties may also apply

29. Sample Form 8300, Part 1

30. Sample Form 8300, Part 2

31. Sample Form 8300, Part 3

32. Sample Form 8300, Part 4

33. 248-262-3400
Venar@ayarlaw.com
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