As the cannabis industry continues to grow and evolve, businesses are faced with unique legal and regulatory challenges. One area that has gained attention is the use of management companies to provide services to cannabis businesses. While the use of management companies may seem like a viable option, there are important considerations to keep in mind, as illustrated by the case of Alternative Health Care v. Commissioner.
Background on Alternative Health Care v. Commissioner
Alternative Health Care was a California-based medical marijuana dispensary that entered into an agreement with a management company to provide various services, including payroll, accounting, and legal services. Alternative Health Care deducted the management fees paid to the company as ordinary and necessary business expenses on its tax returns.
The IRS disallowed these deductions, citing IRC 280E, which prohibits businesses engaged in the sale of controlled substances from deducting expenses related to the sale of those substances from their federal income taxes. The tax court held that the cannabis dispensary and the management company were using the same “pool of funds” and subjected the management company to IRC 280E. The tax court reasoned that the management company’s transactions were directly related to the sale of marijuana and, therefore, not deductible.
Why Management Companies Are Not Advisable for Cannabis Businesses
The case of Alternative Health Care v. Commissioner illustrates the potential pitfalls of using management companies for cannabis businesses. While management companies can provide valuable services to businesses, the tax implications of these arrangements can be complex and risky.
While the use of management companies may seem like a viable option for cannabis businesses, the case of Alternative Health Care v. Commissioner highlights the significant tax and regulatory risks associated with these arrangements. The Canna CPAs advises businesses to carefully consider the potential implications of using management companies and to work with experienced cannabis CPAs and weed accountants who can provide guidance on navigating complex regulations and minimizing tax liabilities. By working with the right advisors, cannabis businesses can minimize risks and thrive in this exciting and dynamic industry.
For more information on how The Canna CPAs can legitimately maximize your tax deductions without management companies, call us today at 833-CPA-CANA or 833-272-2262.
Sandy Suchoff, CPA is the Founder and principal of Lefstein-Suchoff, CPA & Associates, LLC D/B/A The Canna CPAs. Suchoff has been featured and interviewed on MSNBC, FOX News, and Tune In Business Talk Radio as a tax advisor, as well as ONR Oklahoma PBS TV, Chasing News on FOX & WOR, KRQE 13, Cannabis Radio, Purple Haze Radio, and Cannabis Tech & Today as an advisor on cannabis tax and accounting.