Lord v Commissioner, March 4, 2022, is a landmark tax court case whose ruling in the cannabis industry has been consistently upheld in similar cases and has had major implications for taxes for many years. The case involved a taxpayer, Richard Lord, an S-Corporation shareholder in a Colorado grow, who attempted to take a tax deduction for expenses related to his medical marijuana business. Among other things, Lord argued that they were entitled to deduct accelerated bonus depreciation, and that IRC §280E is unconstitutional, The court ultimately held that taxpayers are not allowed to deduct business expenses related to the sale of marijuana, as it is an illegal substance under federal law, and refuted all other assertions and arguments made by Lord. This ruling has had far-reaching implications for cannabis businesses, as it means that they cannot deduct ordinary and necessary §162(a) business expenses and §263A costs—even if their activities are legal in their state.
For those in the cannabis industry, this ruling can have serious financial implications. With no ability to take §162(a) ordinary and necessary expenses or claim credits on their taxes, cannabis businesses may find themselves paying significantly more taxes than they would under normal circumstances. This can be especially costly especially when coupled with state and local taxes, depending on where the business is located.
Fortunately, there are strategies available to help mitigate the effects of this ruling and ensure that businesses are minimizing their tax burden as much as possible, given their specific circumstances. Cannabis CPAs with knowledge of taxation law (the Internal Revenue Code) and case law can help businesses navigate any changes associated with the Lord case and other applicable case law precedents to ensure they are taking advantage of all available deductions and to strategically implement the correlating and applicable accounting and processes . Education is key when it comes to understanding these limitations; cannabis business owners should work with cannabis CPA experts to ensure they understand exactly how this ruling affects their operations and what steps they need to take in order to maximize savings on their taxes each year.
The Lord case is one example of how federal laws continue to have an impact on those involved in state-legalized cannabis businesses despite efforts by states like Colorado, Washington, Oregon and California to normalize these operations within their borders. Until federal laws change or evolve alongside these growing industries, it is important for those involved in these activities–especially those looking into starting a cannabis business–to remain informed about potential regulations that could come into play so they can best plan accordingly both financially and operationally.
For cannabis CPAs working with clients operating within the cannabis industry, knowledge of taxation issues impacting these entities is essential in order to advise clients appropriately while minimizing the risk associated with potential adverse rulings like Lord’s decision from the Tax Court or future rulings down the road that could add complexity when filing income tax returns. Knowing this information also provides cannabis accountants an opportunity to provide additional services outside of traditional accounting roles, such as helping clients set up effective bookkeeping systems, GAAP accounting, corroborating work papers, or creating more comprehensive financial plans tailored around understanding current laws affecting taxation for cannabis businesses at both a state and federal level if applicable now or later down the line. As this industry continues to evolve over time – along with its corresponding regulations – having guidance available from an experienced cannabis accountant or cannabis CPA firm who specializes in this field will be an increasingly valuable asset for any entrepreneur looking to operate legally while maintaining fiscal responsibility within an ever-changing landscape.
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.
