Most businesses in most industries are struggling in these difficult times, but cannabis business owners are receiving a double blow because of the 280e provision of the tax code, which still applies to cannabis, which is classified by the DEA as a Schedule I controlled substance. Because of this, cannabis businesses are not only taxed more heavily than they should, they also find themselves ineligible for federal funding, including PPP loans. How can you make the most out of this situation? The answer may be in your balance sheets. Join Tony Frischknecht as he interviews the 280e CFO, Kevin Wannlund. Kevin helps cannabis business owners increase their profits and business valuation by giving helping them create audit-proof paperwork that can save them thousands of dollars in IRS penalties. Listen in as he explains what the 280e is and how cannabis business owners can set up their accounting to make the most of existing tax laws and end up with less liabilities and more profit.
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Beating 280e With Audit-Free Accounting With Kevin Wannlund
Taxes are important. There’s a lot of the industry that is praying that the legal guys lose on this. They love the high taxes that come to you as the real business entrepreneur that’s trying to do things right. I know it’s a part of it, however, the survival of the industry itself is a need. I like to focus a lot on understanding what strategies there are out there for you as business owners that you can take advantage of. It can be the beginning of your business’s growth or the end of it and I’ve seen it happen on both sides.
I’ve seen people win, I’ve seen people lose. Hopefully, me and my guest will able to provide you another tactic that you can use to capitalize and grow your business. I have with me Kevin Wannlund. He started a company called The 280E CFO. He’s helping cannabis business owners lock-in long-term growth using all four levels of cannabis accounting. Kevin had worked in auditing and with companies such as Lowry & Associates, Inc., Alliance United Insurance, and Alliance Defending Freedom. He’s been in the auditing world for quite some time. Kevin, thank you for joining us. How are you doing?
I’m good. How are you?
I’m doing fantastic. Will you share with the audience a little bit more detail on your background in the auditing area?
I fell into the auditing side of accounting. What excited me about it was the chance to get out of the office and meet a lot of other business owners. I did a lot of traveling throughout the State of Arizona. I lost track after several hundred in one year and realized I’ve met easily over 1,000 business owners over the several years that I did those audits. As for insurance companies, I didn’t have to dig and probe like an IRS auditor or anything like that. It’s more higher-level stuff, but it allowed me the chance to talk to a variety of business owners in a lot of different industries. I realize some of their pain.
It’s some of the normal pain of running a business. A lot of it on the tax and accounting side, I could see things that they were missing out on. A lot of times I’d wonder like, “Why are you still being taxed this way when you can tell the IRS that you want to be taxed in a different way and save a bunch of money?” I wasn’t allowed to bring that up during the audits. It started to bother me as I’d see some of the same business owners over and over and see that they’re blowing money out. At least that’s the way I looked at it. If you’re not taking advantage of the tax code or if you’re not understanding your numbers in your profit and loss, your balance sheet, cashflow, and all that stuff, they weren’t growing the business.
On a scale from 1 out of 10 businesses, how many businesses take advantage and use the tax code to its potential?
I’d say 1 out of 10 have nailed it. Another 2 or 3 out of 10 might have some semblance of some basic things going on. It maybe a little bit higher than that but they might have some basic stuff but then their accountant doesn’t have time to dig in and figure everything out. They make a couple of quick changes and that’s it.
Do you think people are lazy or they don’t want to spend the money to go deeper? What do you think that is?
It’s a couple of different things that I noticed talking to the business owners and even meeting with their accountants. A lot of times, they don’t want to meet an auditor. They just send me to their accountant’s office too. I saw both sides. From a business owner standpoint, a lot of it does come down to money. You want to watch your costs. You don’t want to pay exorbitant fees to outside professionals. Part of that is looking at it and having an attitude of, “I know I have to get my taxes done. I need my books clean or whatever. I’ll find the cheapest way possible to do that.” Another approach that the ones that nailed it, they understood the importance of having an expert on their team that would provide a return on the investment working with that expert. They might pay a little bit more for an accountant but then they’re going to make way more money in savings working with that accountant.
We’re going to try to make taxes as interesting as we can because the simple fact of the matter is this isn’t that fun depending on how you look at it. We’re going to do our best to make it engaging and illuminating for you as much as we can.
Accounting and tax are fun if you approach it with, how can I make as much money off this as possible? A lot of accountants have lost sight of in the industry. They think it’s about the compliance instead of working with the business owner and trying to figure out, “You’ve been at the same revenue for the last three years. What’s going on? Let’s dig in and find out what’s going on here because you should be growing.”
Being strategic is a lot of it. As business owners, people want to get their taxes done and get through it. They don’t realize how much money they’re leaving on the table at the end of the day. If they got into some of those, they could save $5,000, $10,000, $12,000, $15,000 if they did it this way. You’d be much more excited at the end of paying taxes if you were able to save some real dollars that you didn’t have to pay out to the taxman.Accounting should not be for compliance alone. It should be about figuring out how your business can profit and grow. Click To Tweet
Any time you feel like you’re sticking it to the IRS, you know that you’re covered. You’re well within the confines of what they allow. It feels great.
Legitimately when you’re talking, people don’t understand the fine line it takes, especially in the cannabis world. I was engaged in it for quite some time when we weren’t sure if the stay was going to stomp us out as a business. We were extremely worrisome. That mentality of moving forward and understanding that we’re using the tax code the way it’s supposed to be used and not to be scared of the IRS is something that I feel the old way of thinking. We need to change that and let those guys know it’s okay to press the limits sometimes and it’s okay to maximize your deductions. With that said, where will it be getting the relationship between the CARES Act? What we’re going to be talking about has a lot to do with the CARES Act and one of the tax codes, 471(c). Where’s the correlation? Where did those guys tie-up? Can you share some of that info with us?
I believe 471(c) was slipped into the 2018 Farm Bill. Most laws are passed these days, there are a million other things tucked inside of them and this was one of them. What started tax attorneys and stuff like that digging into this and what it means was because there was an Inspector General report that came out towards the end of March 2020. They highlighted 471(c) and even asked the IRS to provide clarification on this. The IRS disagreed about the need to provide clarification on it. It’s a newer provision that is untested yet very interesting. I could provide a lot of tax savings for cannabis businesses.
How does the CARES Act affect businesses, not only cannabis businesses but businesses throughout the US?
The CARES Act was passed during the first shutdown of the first quarantine. At least where I am, we had a second round so we call it round one and round two. This was to provide the PPP loans for people, the Paycheck Protection Program. That provided a loan to businesses to cover payroll. There are a lot of different stipulations on it. It can be forgiven if you used it the correct way, track it, and do everything your bank says you need to do to submit all the paperwork. There are a lot of issues with it as with anything that was passed in a hurry like that bill was.
It did a lot of help for some and a lot of other people felt hosed by it. One of the big groups that felt hosed by it was the cannabis industry for it being considered a schedule-one drug still on a federal level. It eliminated those businesses from receiving federal funding because the PPP loans or it was a type of an SBA loan. The government took something that existed and augmented it for businesses. Since it’s federally backed, there was no way they were going to be able to give that money to people that had a federal level of trafficking schedule on substances.
Cannabis companies got the backing of a lot of states, especially here in Colorado where they were deemed essential. That’s helped them launch out of the shutdown that we have because they never were completely shut down, which was so helpful to them. We’re starting to see some companies starting to shine now because of that.
I’ve seen reports in MJBiz and they try to collect a lot of data. Cannabis seemed like a 40% increase in revenue. There were some locations that were heavily dependent on tourism. If they were able to quickly pivot, reach out to their community, and let them know they’re there, they seem to regain their customer base. It seemed to come out pretty well. I’ve seen others that struggled and those are the ones that either weren’t deemed essential or they are more on a CBD or hemp angle. Those have had more mixed results but by and large, I saw a sizable increase in revenue. I always tell business owners that this is what I think that accepting government money is a double-edged sword. It can help you but it does come with strings attached and additional things to think about. If you saw an increase in revenue because of COVID, then you’re doing well. You didn’t have to take government money and worry about it.
Let’s get to this part that we were talking about. It’s an amazing secret that nobody’s been talking about. At least, I’m not hearing it or reading anything about it, but there are few people that know about 471(c).
I haven’t heard it widely talked about. I know there is a group of us cannabis accountants that we feel we’re on top of it. We sought out expertise from a high-level tax attorney that studies this and he has a background in the IRS. He gave a detailed presentation. There is a group of us but it’s not something that I see being talked about every day. Most people know 280E. Some people know some of the other codes but this one is not widely known yet.
I’ve talked to some large accounting firms. Are you familiar with Greenspoon Marder?
Yes. We’re talking about Nick Richards.
I also am very familiar with Rachel Gillette. She’s been in the industry since ‘09. She’s been around the block. She’s a great person of knowledge and worked in this system for a long time. If you look at some of this stuff, we’re talking about saving business owners tens, hundreds, potentially millions of dollars in lost.
It’s with an asterisk after it because it’s not tested in the courts yet. We all wait for major court decisions to test new laws. We keep hoping for somebody big. Harborside is fighting its own battle for the industry.
I love those guys. They’re strong and they keep putting money into this industry. I appreciate what they have done in last couple of decades.
We had some snarky comments about another high profile company that’s not doing so well. They were wishing that they had stuck around long enough to test this one for us. The other thing that we think about is if we can get the word out about it and if we get a critical massive company that conform their books and records to the 471(c) then it’ll help strengthen the case for it.
Let’s start as a base one business owner. He comes in and he goes, “I got my store. I’ve got my employees. I’ve got my grow about ready to produce. We’re looking at about six months, now I need to look at accounting.” I’m coming in not from the industry but I’m going to start as a retail accountant as a cash method that they’re doing their accounting set up. How can they organize their company around to utilize 471(c)?
280E is a tax code that’s basic. It came about because of the war on drugs in the early ‘80s. It’s a lot easier to build a tax case against somebody that the government deems a drug dealer than it is to build a criminal case for murder or other things. Financial crimes are usually paper trails. It’s easier and cleaner to lock people up for that. 280E came about as a result of that. It came out in the early ‘80s and it says that you have to report your revenue to the IRS. If you’re trafficking schedule-one substances then you’re not allowed to take any deductions. It’s like the IRS is saying, “Even if we say that you obtained that money illegally, you still have to report it to us and it has to be taxed.” The kicker is you got to report it, so you get taxed on it but then you don’t get to write-off all your normal business expenses.
It’s one of the most understating parts about being in the cannabis industry.
Another case came out that clarified that you can deduct your cost of goods sold. That’s subtracted out of your revenue. I like to explain cost of goods sold as the money you had to spend to make that money. You had to buy some inventory, mark it up, and sell it. Whatever you paid for that inventory, that’s your cost of goods and then you sell it. The IRS gets a slapped down in a case saying that while this person is trafficking schedule-one substances, they could take some deductions but it had to be related to their inventory. That’s where some of the wonky accounting comes in because then we play all these games with the tax code that if they’re retailers or manufacturers, they should be doing it anyways to track their numbers better. They try to dissect how much of your overhead can you slip into your cost of goods sold as deductible. That’s the quickest way I can explain 280E and where we are in the industry now.
That’s a good explanation without going too far.
There’s other case law that dictates how much of that overhead and which pieces of your overhead you can stick into your cost of goods sold. That’s where 471(c) comes in because it doesn’t have all these other strings attached to it like the other parts of 471(c) where it says that if you’re a retailer, you can deduct these other kinds of overhead stuff but you have to do it this way. It has to be in accordance with GAP or Generally Accepted Accounting principles. There are all these tight regulations around it. You’ve got to have monthly work papers to tie everything out from what you’re going to put on your tax return versus what you look at as a business on your monthly numbers. 471(c) just says that as long as you fill out your tax return to reflect whatever your books and records say, then that’s your method of accounting.
That can go into your cost of goods bucket.
The argument to be made here is that you notify the IRS that you’re changing your method of accounting. Now, it’s accrual if you’re set up that way, which you probably are if you’re doing all the inventory and all that stuff. If you already set up as accrual, you file another form with the IRS and they have to accept it. You say, “I’m going to do my accounting this way according to 471(c).” There are a couple of other letters and numbers after that. My returns are going to be in accordance with my books and records. If you happen on a monthly basis to do some work papers that reallocate a bunch of your costs and then cost of goods sold, you’re playing this game where you’re able to deduct all your business expenses and their cost of goods.
What are some of the steps that you could recommend to people? I always put this out there with all the stuff we’re talking about, please speak with your CPA or your tax accountant to verify this because there are some risks involved. We’ll try to talk about some of that too. What kind of steps can business owners take aside from going and filing this form with the IRS? What would they have to do in their business if they had to switch their accounting? Is there a lot of work? Are there 4 or 5 steps? What do they have to do?
It’s mostly more work for your accountant or it could be less work, depending on how you look at it and how you decide to do your books and records. It could be simpler. There’s full cost absorption accounting that helps maximize what you’ve put into cost of goods sold. A lot of that has to do with what’s in the ground right now and when it’s going to be harvested. There are complicated inventory sheets that we got to have. The owners fill it out, then we work our magic.\If you can decrease your tax liability, you can free up more money to set up your cannabis business for future growth, Click To Tweet
If Kevin had his client come in and they said, “How do you organize this, Kevin?” If I want to switch to this, how would Kevin walk his clients through? I know there are a lot of different steps to take but if you said, “We start with the grow, we go to the retail, and we deal with transfers over.” Can you give us a few steps on how that would work?
If a business owner came to me and was like, “I want to do my accounting according to 471(c).” They understood the risk of it that is untested but it is in the tax code. It is law so that is strong. It’s not somebody writing a memo or making a recommendation. It doesn’t have to be challenged in the court. If they wanted to do that, I would say, “Let’s fill out this change of accounting form and send it to the IRS.” From there, procedurally, there wouldn’t be a huge change for the business owner themselves. It would be me on my end changing in all the spreadsheets that we have to do outside of QuickBooks or whatever the accounting software is. We changed some numbers and some allocations there. That’s to gets going. There would be ongoing stuff but letting the IRS know you’re going to do it and talking with me, “How much do you want to put in it? Are we going to allocate 50%, 70%, 60%? Are we going to come up with some other method that every month we’re going to sit down and figure out how much we’re going to put in a cost of goods?” That’s it.
Can you tell me how else people could potentially benefit from 471(c) that you know?
That’s the biggest one. It’s being able to maximize what you put in to your cost of goods sold so that it reduces your net revenue or your gross profit. The IRS has slightly different terms sometimes for things. They called your revenue the money you bring in minus your cost of goods sold. That’s how 280E stuck. If you’re decreasing your tax liability, that gives you a huge leg up. Imagine all the money that you throw to the IRS and now you’re able to set it aside. I would advise leave it there for now because if it does get challenged, you would want to have it set aside to be able to pay the back taxes on it.
Put it in a market and then let it grow while you’re sitting.
That reminded me of a second thing that’s important for 471(c). It is filing the change of accounting form. You can openly disclose whatever you’re doing to the IRS to give them a heads up. There wasn’t any set procedure but we have noticed that talking to other tax professionals when their clients get audited. If they talking to the auditor, they would say, “If I had filed a disclosure, letting you know that we’re selling cannabis, would you still have needed to audit us?” Sometimes they would say, “No,” because then your tax return would make a lot more sense.
Sometimes even letting the IRS know upfront what you’re doing, that you are changing your accounting and you’re going to do it this way. At least disclosing eliminates the ability for the IRS to assess higher penalties and fines on you later. That’s part of the strategy of using 471(c). Let the IRS know what you’re doing, it’ll keep them from being able to assess further fines and penalties because you’ve told them what you’re doing, and leave the tax savings. Set it aside and spend judiciously until it’s settled in court or there’s further clarification from the IRS.
Let’s say you have to go to tax court or you have to negotiate something with the IRS, it also gives you something like, “We did make you completely aware that this is what we were doing.” It gives you another paper trail to allow your attorneys to fight with you because they need all the tools they can get when it comes to the IRS.
It’s important too because part of that Inspector General report that I referred to that came out, the Inspector General told the IRS you should be auditing more cannabis businesses because we make $3,500 an hour doing those audits. There are a couple of different breakdowns in there but the highest one was when we audit these types of businesses in accordance with these programs, we make $3,500 for every hour the agent is working on it.
That’s another thing for you that are fighting and keep fighting it because they’re making it. People are saying, “Here’s your money,” and they’re not putting in the effort paying for tax attorney to take them through the process. One of the biggest things from that audit report that I noticed and I’m not sure how many people have read it yet, but the IRS isn’t sharing their guidelines for compliance on how to comply with the IRS and cannabis, which makes it extremely hard. What are we shooting for if we don’t know where the targets at?
The Inspector General, from what I remember in the report, point-blank told the IRS, “You need to come out with recommendations, clarification, guidelines or something on 471(c) because this is all it says. It says this is what businesses can do with it.”
Do you remember what the response of the IRS was?
There’s no need to comment or we disagree.
Kevin, what was it that you like the most about this interview?
Any time I can explain something, try to make something that could be boring or technical, try to make it come alive, and this is why it matters to somebody, that’s the stuff I love doing. That’s why I got into helping businesses with their tax and accounting because I like teaching people.
I learned some stuff, which is always fun for me. I hope there are some people that are like, “What’s this 471(c) thing? I need to dig into this.” It could be the best-kept secret now across the industry. “Kevin said I haven’t heard many people talking about it. He’s heard some tax people discussing it a little bit, but not the whole United States as it is.” People can find you at the 280E CFO. They can check you out or they can Google you. Kevin, I want to thank you for educating me a little bit more on this. Thank you for that. I also want to thank the readers for spending a few minutes with me. I know I may have taken this a little longer but this information is extremely valuable for you to tap into. I’ve sent something out there but I would like to request if you know of any accounting methods where you’re like, “I’m using this and it’s crushing it for me,” please let me know about it. I would love to share with the rest of the people out here because we all get so busy building our companies.
We don’t realize the valuable information that we could be sharing with our neighbor. I know some of you are competitors, however, to get this thing to go full legalization, we have to come together on a lot of this stuff. This is extremely valuable to a lot of people out there for navigating through the industry. Please share your information with me, PlantProblems.com. You can also catch me on my LinkedIn at Tony-F2020. Check me out there and give me a little feedback on what you are doing. I’d love to hear it. If I like it, I will take it and we can make an episode out of it. We can talk about that further. Kevin, thank you so much for spending some time with us and giving these guys a new technique. I’d love to have you on in the future to discuss if you come across something new that can help some of our legal taxpayers out there. I appreciate it.
Thanks for having me on.
- The 280E CFO
- Greenspoon Marder
- @280e.cfo – Instagram
About Kevin Wannland
After years in the accounting industry I got bored of the run of the mill accounting. It didn’t leave room to make real impact. I wanted to save businesses massive amounts of money.
I love complexity and spent years studying the cannabis industry. We do many things differently.
We not only do bookkeeping, we show cannabusiness owners:
✔The 5 Things You Must Have to Survive an IRS Audit that Most Accountants Don’t Do or Get Wrong
✔3 Steps to Securely Handle Cash that Makes Lenders and Investors Happy
✔How to Stress Test Your Business to Plan For Growth, Expansion, and Selling/Exiting
✔How to Forecast In An Ever-Evolving Industry So That You Can Make Better Decisions
⭐MY EXPERTISE: We help cannabusiness owners gain a sense of peace and clarity. It starts with having accurate numbers, but the REAL benefit is knowing what the numbers mean. We show you how to work on very specific items to increase revenue and profitability on average 3-5%. No more guesswork!
Responsive, Available, Proactive, and Thorough.
Audit-proof paperwork can save you $100,000’s in IRS penalties. It can even increase your business valuation by 5% when exiting.
⭐WHO I WORK WITH: Cannabis, CBD, and hemp. Any stand-alone vertical or fully integrated. Hemp farms included. I work with business owners who:
✔Want Top-Notch Service
✔Want to Become (or Already Are) Rock Solid Business Owners
✔Are Mission Driven
This is not for those who:
❌Think Cannabis Is A Way To Get Rich Quick
❌Like Taking Short Cuts
❌Think They Know Everything
⭐HOW IT WORKS: We start with a 15 Minute CEO Call to find out if you’re a good fit. If you are, then we set up a follow up call to outline all that you can expect from us. From there we roll up our sleeves and get to work!