Finding out the Worth of a Cannabis Business—Before the IRS Does
During William Fowler’s nearly 20-year employment with the IRS as a Federal Commissioned Officer, he developed a process to assist with more accurately valuing businesses and corporations being audited. By implementing the process and simply asking the right questions, along with his expertise in valuation, he increased the IRS’s western region’s receipts by over 500% in one year alone.
But now, the man who modernized the IRS business valuation process, to the chagrin of some of the largest net-worth entities in the United States, has partnered with Nevium to help businesses capture additional business value while minimizing their federal tax burden, particularly in the cannabis industry.
Cannabis Industry, Take Note
Businesses that don’t properly substantiate their write-offs and deductions will always be at risk for triggering an audit from the IRS, but the legal landscape facing some emerging industries presents unique complexities for which they will need to be prepared. Take for instance, the cannabis industry. While the sale of marijuana is legal in some states but still against federal law, these businesses operate in a financial gray area.
“The IRS is determined to wade through this ambiguity to tax cannabis businesses to the fullest extent,” says Fowler. “They have a cannabis audit team ready to take on the industry.”
IRS Code Section 280E was created to address the write-off of expenditures associated with running marijuana businesses, which cannabis businesses must file because, although these businesses aren’t recognized as legal by the federal government, marijuana is still classified as a Schedule I drug under the federal Controlled Substances Act. Section 280E essentially eliminates the normal business expenses a non-cannabis business is allowed to write off.
“When cannabis plant-touching businesses submit their tax returns, the IRS will be looking to see if the business is operating under legal guidelines or not, very likely through an audit,” says Fowler. “In fact, the taxpayer should expect a ‘full’ audit because as far as the IRS is concerned, the owner is operating a business that is considered illegal under federal laws.”
An audit could trigger inquiry into the Cost of Goods Sales ledger, as well as cross-checking expenses and revenues to their source, among many other areas of the business’s financials. In the event the IRS audits a cannabis plant touching business, the owner would be wise to have their financials readily available with complete fact substantiated.
The IP Connection
In addition to scrutinizing a business’s transactions and expenses, the IRS would also look to see if the business has had its IP portfolio and other intangible assets appraised in order to determine if the business is allocating the correct amount to amortize expenses.
“The IP portfolio is also an area of opportunity, however,” says Fowler. “For cannabis entrepreneurs, the IP portfolio is basically the most opportune way to compensate for the taxing effect of 280E, and the IRS will not be able tax that portion of revenues that are not attached to the cannabis revenues as it applies to the IRC 280E issue.
Fowler is a pioneer of cannabis business valuation, having adapted the groundbreaking techniques he developed at the IRS for the industry and published on the topic. Read “What to Look for in Valuing a Cannabis Business” here.
“The potential for valuable IP in a cannabis business might surprise you,” he says. “New strains, approved trademarks, unique graphics, cultivation rights, etc., can all provide nontaxable revenue as it applies to IRC 280E.”
As in any new opportunity, such as the cannabis industry, there are risks and rewards. With Fowler on board, Nevium has a roadmap to help business owners, from growers to sellers, understand their business and IP value, minimize their federal tax burden, and enjoy more of the rewards of cannabis entrepreneurship.
Contributing Advisors
