Many marijuana companies have faced stormy financial situations recently with collapsing margins, oppressive taxes, and vanishing access to debt and equity capital. Despite financial woes and needed financing, cannabis businesses should pay federal taxes.
Non-Payment of Cannabis Taxes Isn’t Cheap Financing
If you’re facing this situation, it can be tempting to forego paying your estimated federal tax payments. This can look like a short-term solution to what you hope is a short-term problem. Non-payment of federal taxes can also seem like cheap financing compared to a loan.
However, ignoring your estimated federal tax payments is an unwise move. Although it may seem that interest paid on federal unpaid taxes is lower than interest on other kinds of debt, don’t be fooled.
Unpaid taxes include penalties. When you add up interest rates on tax underpayments and applicable penalties, the result is costly financing. This is especially true for large corporations, which could get slapped with higher underpayment interest rates, resulting in non-deductible underpayment interest.
Cannabis Insolvency = Receivership
Unlike other forms of debt, when the IRS comes calling for cannabis tax collection, your business will have to pay the amount owed (tax, interest and penalties) sooner or later.
If your marijuana company isn’t able to make estimated tax payments, you may be insolvent or heading that way. In ordinary circumstances, insolvent businesses would negotiate with creditors and, if needed, pursue reorganization in a federal bankruptcy proceeding.
But cannabis businesses can’t go bankrupt. Why? Because marijuana companies are still illegal under federal law, due to Federal Statute 280E. Federal bankruptcy courts won’t hear petitions from federally illegal enterprises. Instead of bankruptcy, when cannabis companies can’t pay their bills, they can be put into receivership under state law.
How Receiverships Work
In general, a receivership is a process that is put in place to protect a company. During this time, A “receiver,” or trustee, steps in to manage the entire company, its assets, and all financial and operating decisions. While the receivership is operative, the company’s principals remain in place as material contributors, but their authority is limited.
Cannabis Tax Advice Is Needed for Receivers
If your company is facing financial challenges that make you unable to pay your bills and cannabis taxes, consider:
Receivers need to be correctly guided with respect to the complex cannabis tax and accounting issues that are raised by operating a marijana business.
Tips for Marijuana Business Receivers
- Ascertain the cannabis tax liability of the company
- Review current and open tax returns to ensure they are correctly prepared
- Tax due may be unclear due to overzealous enforcement of Section 280E by the IRS
Without the help of cannabis tax team with specific experience, state-level cannabis receiverships can be unpredictable and unfair.
Alternatives for Struggling Cannabis Companies
If you’re a struggling cannabis company, make paying your taxes a priority. Work on staying financially solvent and avoiding receivership by negotiating with your creditors.
If your marijuana business hasn’t already taken the ill-advised nonpayment approach, there are alternatives. These solutions are complicated and require excellent record-keeping and accounting as well as experienced advisers.
Ideally, this situation would be improved by reforming the tax code with regard to Section 280E. However, this is not expected to happen soon, so cannabis operators need to be realistic and face the industry’s challenges now.
If you have questions, reach out to us at 314-961-1600 or contact us to discuss your situation.
To check out our other articles on business topics, click here.
David Smith helps businesses and individuals develop smart business practices for tax and accounting advantages as the president of Smith Patrick CPAs. He is involved in the cannabis industry in Missouri through MoCannTrade and other organizations, helping cannabis operators with their tax and accounting needs.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.