How to Reduce your Portland / Multnomah County Tax via Additional Nexus

Portland and Multnomah are one of the only jurisdictions which impose three levels of business income tax, Federal, Oregon and Portland/Multnomah County.  This can dissuade business from new business owners from setting up a business in Portland/Multnomah County and head for the tax friendlier Washington or Clackamas Counties, which don't impost a local income tax.  But what about companies that are already in Portland/Multnomah County? Are there any tax savings opportunities?

The most overlooked tax savings opportunity that I've encountered is the non-apportioning of gross receipts. What does that mean?  Businesses only need to pay tax on a percentage of their income based on their relative percentage of sales to customers located in Portland/Multnomah County. However, there's one caveat: sales of tangible personal property may be apportioned only if a business has payroll or property outside the jurisdiction . In other words, if the company doesn't have payroll or property outside of Portland/Multnomah County it must to pay tax on 100% of its income to Portland/Multnomah county even if 99% or even 100% of its sales are to customers outside of these jurisdictions. Conversely, a company could be based out of Portland/Multnomah County and have a small presence outside of the jurisdictions, and if 100% of its sales are to customers outside of the jurisdictions, then the company would only pay the minimum taxes of $100 each to Portland/Multnomah County.

Establishing a property presence outside the jurisdiction can be done very easily through renting a PO box or even data storage outside of Portland/Multnomah County.  In tax terminology, this typically refereed to a establishing "Nexus" or a taxable presence.

Let's run through a scenario.  Imagine an cannabis producer located in the city Portland and Multnomah County.   This grower has an exclusive contract with a processor/extractor in Clackamas County.  The company's Portland/Multnomah County taxable income is $1,000,000. If the company has not established nexus outside of Portland/Multnomah County, it would pay tax on 100% of this income resulting in $36,500 in tax.

Now, let run the numbers to see what the tax liability if the company did have property outside of the jurisdiction.  The same company would have a Portland/Multnomah County tax liability of only $200 if it had established nexus outside of the jurisdiction.

This may seem too good to be true, however it is an often overlooked opportunity by many unsuspecting taxpayers based in Portland/Multnomah County.

The same concept may often be applied at the state level in order to minimize the income allocated to higher tax states and shift to lower tax rate states. For example, an Oregon based company would want to establish Nexus in Washington (which has no business income tax) in order to shift a portion of its income based on the relative gross receipts to Washington. 

Slander is spoken, but in the information age libel will leave you liable. The internet never forgets. Don't let a grudge cost you where it counts, your wallet!

The cannabis industry has more than its fair share of failed ventures, and typically in their wake is a soured relationship between former partners--partners that often times were best friends or family.  Inevitably, these entrepreneurial minded partners diverge off on their own endeavors and in competition with one another, and as you can imagine drama often ensues.

Great minds discuss ideas; average minds discuss events; small minds discuss people.  -Eleanor Roosevelt 

Don't get caught up on what your ex-business partner is doing. Focus on the idea of building your business. The more you focus on getting back at a failed business partner, the more you distract yourself from the ideas that are going to make you succeed, and the more you're going to open yourself up to civil lawsuit liabilities. Since I’m a CPA, I’ll use my own industry as an example. In a recent Florida court case, a CPA was awarded $9.4 million after being disparaged by a former partner. 

IN ONE OF THE LARGEST DEFAMATION VERDICTS IN MIAMI DADE COUNTY HISTORY, LEAD COUNSEL SCOTT MAGER REPRESENTED A WELL-KNOWN CPA

The suit arose out of a CPA who was allegedly defamed by a former partner.  The disgruntled former partner of Plaintiff, after purportedly being terminated, wrote a letter to many of the Plaintiff’s clients, alleging (among other things) that he was under the influence of illegal drugs.  Plaintiff claimed that he lost substantial business as a result.  Defendant claimed that he had evidence supporting his allegations, and that in any event, the Plaintiff could not prove any specific damages were linked to the letter. Mager was able to show the utter absence of any evidence, showing that the wrongful conduct should never have occurred.

As many know, the challenge in defamation cases is illustrating the amount of damages suffered by the plaintiff, both from an economic loss and personal injury standpoint.  Mager handled the case with class and elegance, and neatly depicted the damages through devastatingly emotional testimony from the victim/plaintiff, coupled with wonderful visual aids and detailed evidentiary showings of specific loss business as a direct result of the defamation, also utilizing.

The jury truly felt the harm suffered by the victim, and through the presentation of the evidence and what a live witness referred to as a “brilliant and emotionally moving” closing argument, Mager was able to secure a $9,400,000 verdict, including $1,000,000 in punitive damages.

If the defendant had said what he wrote over cocktails, the lawsuit would likely have been impractical and unwinnable, however the defendant was so bold and small minded as to send letters to the plaintiff's clients, leaving a literal paper trial.  Emails are even worse! They can be forwarded, saved, archived and will definitely be your worst enemy if you're a defendant in a libel case.  

For example, the hypothetical email below illustrates what would be considered slam dunk evidence in a libel case as it is disparaging in its vary nature.  The sender made an unfounded accusation of a crime with the intent to hurt our reputation in the eyes of the recipient. Private persons are also afforded more protection in defamation lawsuits as well, and the nature of being a CPA doesn't qualify as a public person.  So even if the sender would have used "allegedly" or "reason to believe" instead of "concrete" it still could potentially qualify as disparaging. 

Date: Thursday, June 7, 2017 at 10:29 AM

Subject: Recent Articles / Bro Tax, LLC & Top Cannabis CPA blog

Hi Bob:

I hope you are doing swell!

Recently I have seen two blog posts written by Ben Condon, CPA and Joe Bailey, CPA on your website.   Ben and Joe are former partners of Bro Tax, LLC and we have concrete evidence that they stole intellectual property from our Firm.  I wanted to inform you directly to allow you to contemplate future considerations on publishing their articles.

Thanks and let me know if you have any questions or want to set up a time to talk.

Thanks,

Partner Wanting To Get Sued

Truth is your best ally. If what you say or write is factually correct, it is by definition not disparaging.  If your former business partner has a publicly available criminal record, you are under no obligation to obscure or hide it, and in fact you can scream it from the highest of mountain tops and tweet it, Pin it, Snap it, and Instagram it to your hearts desire. Because that person has been convicted of a specific crime, there is nothing disparaging or slanderous in telling someone else, because it is a FACT.  In the above example, however, an unfounded slanderous claim is being levied against myself and Ben and if you read closely you’ll notice that it is being written to a member of the press with the express purpose of damaging business relationships.

I found this article very informative regarding the legalese of defamation, slander, and libel. 

As I mentioned above, worrying about someone else doesn't help you grow your business. Focus on your business and save yourself the drama. If your ex-partner is unscrupulous, chances are most people already have the same poor perception of that person, and therefore it goes without saying or more importantly, writing. Focus on building your eminence, brand, work product, and don’t let years of hard work fail just because you can’t keep your emotions in check.

(all sites used as reference have been linked or referenced where appropriate. If you feel we have missed a citation, please reach out and we will get it fixed!)

Cannabis State Tax Series - Introduction

Executive Summary

Ben Condon, CPA, Founding Partner of BC Consulting, LLC kicks off his blog series which will define the jargon, provide a general conceptual overview, and implications of state and local taxes on cannabis businesses. 

Albert Einstein once said "The hardest thing to understand in the world is the income tax." Well, he was right!!! That was even before code section 280E, and most states didn't even have income taxes back then, yet.

Early in my career as a tax CPA, I was often confused how federal and state taxes intertwined, and any research left me more confused and created more questions than I started with.  I hope to share my understand with the readers of this blog. My philosophy is not to keep my knowledge secret, but to share it, even if that means competitors learn a few things. You should be weary of any CPA that has a "secret" calculation or does not wish to share with you their "proprietary" methodologies. A great CPA should help further their clients' understanding of the tax implications of any transaction by providing a clear logical, legal framework from which to operate. That is my goal.

In this blog series we'll cover the State Taxes 101, and and the more advanced topics of how they specifically relate to cannabis business, dare I say State Taxes 420?

The general topics to be covered:

The various types of taxes that apply to all types of businesses, including but not limited to: income, minimum, alternative minimum, real property, personal property, business and occupancy, franchise, excise, sales, capital, cultivation, transfer, withholding, and margin taxes.  In addition, Cannabis specific taxes will be covered, such as the Oregon marijuana sales tax or the California cultivation and excise taxes. 

We will walk through the conceptual road-map of income from the profit and loss statement to the Federal tax return to State tax return, and possibly a locality tax return. We will also discuss common Federal, state, and local differences along the way, such as:

• Federal 280E Disallowed Deductions allowed for States
• Depreciation Adjustments
• Loss Carryforward / Carryback differences
• Statute of Limitation differences

We will also cover multistate tax concepts, such as:

• Nexus & Economic Nexus
• Allocation and Apportionment
• Flow-through Entity withholding and Composite Returns
• Income Sourcing and throwback

In parallel with this blog series, I will also deep dive into specific states' taxing regimes and discuss the taxes levied on cannabis business in those states and provide tips on how to stay compliant.  "How Oregon/California/Washington/Nevada Taxes Cannabis" 

I'm happy to focus on any topics or specific states depending on your level of interest. 

Hit me up in the comment section and stay tuned! 

Can You Avoid the 10% IRS Cash Tax Payment Penalty?

Joseph Bailey, CPA

If you are reading this, you likely have been hit with the infamous 10% "cash penalty" from the IRS. The below information should be very helpful to you, but please note it is for illustration only as the IRS abates penalties on a case-by-case basis. I am not saying your specific penalty/interest will be abated. (Sorry, making sure I don't get cranky emails from people later!)

With the lack of access to banking, many cannabis companies are forced to operate solely in cash, and this includes making tax payments.

Hopefully, you already read my post on how to pay your taxes in cash. If not, take a look. In that post I mentioned that if you are declined by banks, that you should keep those letters. Well, here is why.

When assessed with the IRS 10% cash penalty applied to companies who do not use the required Electronic Federal Tax Payment System (EFTPS) you may be able to have the penalty abated by showing that you are "unbankable". This was the case for Allgreens v. US in which case the cannabis company was able to have the penalties dropped. The IRS then made some changes to their Internal Revenue Manual wherein they provided some guidelines on having the penalty removed.

Okay Joe, great background, now let's get to the meat and potatoes! How do I attempt avoid the 10% IRS cash payment penalty already?! Please note that there was no precedent set in the Allgreens case, these cases are handled on a case-by-case basis, and you may or may not be able to get your penalty removed. But what is the harm? If it doesn't work, you already owed the penalty. If it does work, it can save you thousands of dollars of unnecessary penalty payments.

1. Apply for bank accounts every year. The Feds will allow up to 2 years, but it is in your best interest in a few ways to try and obtain bank accounts regularly. One, you may just get a good bank account and avoid all of this. Two, an annual (or even better semi-annual) attempt at obtaining banking shows a consistent attempt on your part. The IRS doesn't remove this penalty for people who just decide to not try and get an account, so keep that in mind.

2. Have a qualified CPA draft you a letter response to the IRS.

3. SIGN the declaration letter.

4. Send in the signed letter along with any and all documentation showing your attempts to obtain legal banking.

5. Cross your fingers!

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For assistance, email info@B-Cconsulting.com and visit BC Consulting website

How to Convert a California Nonprofit Mutual Benefit Corporations to a For-Profit Corporation under Proposition 64

By Ben Condon, CPA

Executive Summary

Ben Condon, CPA, Founding Partner of BC Consulting discusses the background of California taxation of cannabis companies walks through the steps of converting a California Nonprofit Mutual Benefit Corporation (MBC) to a For-profit General Stock Corporation and the resulting tax entity flexibility. 

Law Prior to 2018 - Non-Profit MBCs Ruled

Medicinal cannabis businesses in California generally operated as nonprofit mutual benefit corporations prior to 2018.

Although these medicinal cannabis businesses formally are incorporated as nonprofit mutual benefit corporations, they do not meet the requirements for income tax exemption described in Internal Revenue Code (IRC) Section 501(c) or California Revenue and Taxation Code (R&TC) Section 23701, Meaning they must file Form 1120, U.S. Corporation Income Tax Return and Form 100, California Corporation Franchise or Income Tax Return.  Additionally, IRC Section 280E applies to these business, which can severely limit the ability to deduct expenses resulting in a higher effective tax rate. However, they can deduct ordinary and necessary business expenses for California purposes.

Nonprofit mutual benefit corporations are limited by their inability to pay dividends and be sold as there is no stock to sell.  Members generally secure their returns via wages and through liquidation of any assets on dissolution.  

Current Law -  Total Legal Entity Freedom and Flexibility

The Adult Use of Marijuana Act (Proposition 64) passed with 57% voter approval and became law on November 9, 2016. The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), SB 94, passed on June 27, 2017. It established a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis, and related products.

Businesses operating under these state licenses can choose any form of valid business structure for their business. They are able to operate on a for-profit or not-for-profit basis. They are not eligible for California franchise and income tax exemption, as they do not meet the requirements as described in IRC Section 501(c) or California R&TC Section 23701.  This means California cannabis business now have the flexibility to choose from a variety of legal entities to best suit the needs and tax profiles of their owners.  These entities include, but are not limited to Limited Liability Companies (tax as: Disregarded Single-Member LLC, Partnerships,& C-Corporation), C-Corporation, S-Corporations, and Limited Partnerships. 

Converting a Nonprofit Mutual Benefit Corporation to a Stock Corporation

California allows for the conversion of an Mutual Benefit Corporation (MBC) to a general stock corporation by Restating the articles of incorporation of the nonprofit MBC. There is a $30 associated filing fee.  The restated articles must include: 

1. The name of the Corporation.

2. The following general stock purpose statement: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.

3. The number of shares of stock the corporation is allowed to issue.

4. If there are outstanding membership interest, the articles must include a statement of the effect of the restatement on those interests.

Within 90 days of filing the amended articles of incorporation, a Form SI-550 Statement of Information must be filed with the Secretary of State. This form is free to file if filing to meet the 90 day requirement otherwise it is $25 initially and annually thereafter.  If this is the initial SI-550 then the Service of Process information must be included within the amended articles of incorporation in the previous step.  

That's it! Your corporation is now a general for-profit stock corporation which allows for dividends and buying and selling of company stock and allow for more sophisticated legal tax structuring.  

Converting to anything other than a C-Corporation

In order to convert to another legal entity type such as an LLC or LP, the MBC first must convert to a general stock corporation and then convert from there. This is because the conversion of the MBC to a general stock corporation was technically not a conversion, but merely a restatement of its purpose statement and issuance of stock, as it was already a corporation from the beginning, however now with its newly attained for profit status it can convert from corporation to a multitude of other forms. The California Secretary of state website has a large listing of various legal conversion forms. 

Additionally, tax only elections can be made with the IRS via Form 2553 and/or Form 8832 which allow the corporation to be taxed as an S-Corporation, Partnership, or disregarded entity depending on the fact pattern without further legal conversions at the state level.

Please note that the above is provided for illustrative purposes only. For more information, reach out to us at info@b-cconsulting.com 

Importance of Efficient Tax Structuring for Cannabis Companies

By Ben Condon, CPA

Executive Summary

Ben Condon, CPA, Founding Partner of BC Consulting, LLC walks through a hypothetical legal entity structure for a vertically integrated cannabis company and highlights the need for upfront tax structure planning in order to avoid disallowed expenses and plan for future growth, investment and sale. 

One of the first questions every entrepreneur should ask themselves when starting a new business is: "Which type of legal entity should I setup?" In the cannabis industry, you should ask yourself "Which types of legal entities should my businesses organize to maximize tax savings?”  Entities? Yes, plural. 

Most of us are familiar with the common types of entities: Limited Liability Companies (LLC), C-Corporations, S-Corporations, Limited Partnerships, General Partnerships, etc. Due to IRC Sec. 280E, the only avenue for cannabis companies to recover their costs is through costs of goods sold (COGS), therefore it is necessary to employ multiple strategies including varied entity types. Costs such as sales, advertising, and delivery, commonly referred to as "SAD" costs, have no avenue to inventory/COGS.  As a result, careful tax planning is necessary in order to absorb costs into inventory throughout the entire value chain. 

In this post we will walk through an example of a vertically integrated life cannabis company founded by three individuals.  The company will produce, process, distribute, and sell high quality cannabis products in addition to branded apparel and paraphernalia.  The three founders are direct owners of Life Cannabis Company ("Life") which in turns owns three major subsidiaries: Licensed Cannabis Producer ("Producer"), Licensed Cannabis Wholesaler ("Wholesaler"), and Licensed Cannabis Retailer ("Retailer").  

Life's functions will be various, however at no point will it engage in the trade or business of trafficking cannabis. Those functions will be reserved for the underlying licensed cannabis companies. Life will advertise and hold the intellectual property, lease personal and real property, perform management, procurement, supply chain/logistic, and finance services for the underlying companies, and be the holding company and investment conduit. This will allow investment into a single entity and allow founders to easily sell ownership. 

Producer will cultivate cannabis and sell exclusively to wholesaler at an "arm's length" (fair market) price.  Producer's non-cannabis supplies will be purchased from Life with a procurement fee added, Producer and each other underlying company will lease it's property from Life (whether or not Life owns its property or leases it from a 3rd party and subleases to Producer). 

Wholesaler will purchased branded packaging from Life and then package cannabis purchased from Producer with this packaging.  This allows Life, a non-cannabis entity, to deduct its advertising as regular cost of doing business, and also categorizes the cost to Wholesaler as part of inventory/COGS. Wholesaler will then sell the branded and packaged inventory to Retailer and other 3rd party licensed cannabis retailers.

Retailer's store will be more than a cannabis store, it will be an experience of the lifestyle portrayed by Life's branding. Only a small portion of Retailer's square footage will be dedicated to cannabis products, while the majority of the store will house non-cannabis, Life branded items. This will minimize the non-deductible expenses that are deemed sales/trafficking related and allow for a bifurcation of expenses between non-cannabis and cannabis business lines. The non-cannabis business line will be able to deduct expenses similar to any other business, further reducing the impact of Sec. 280E. (See CHAMPS v. Commissioner) 

One important thing to highlight is that this structure allows for quick expansion as the intellectual property can be licensed and non-cannabis branded packaging can be sold across state lines to either 3rd party affiliates or to wholly owned licensed cannabis companies entities yet to be formed regardless of state.

The C-corp in this structure is necessary in order to create regarded tax partnerships at the cannabis business level in order to be able to have 3rd party transfer pricing. Without this, each entity would be a Single Member LLC under Life, and would be treated as divisions of Life; the operations of Producer, Wholesaler, and Retailer would consolidated and reported with Life's tax return. The inter-company transactions would be eliminated resulting in an increased Sec. 280E exposure.

In this scenario, we would advise that Life either become either a C-corp or S-corp in order to avoid Self-employment tax. This choice would not be cut and dry and would depend on various factors such as the state, tax situations of the individual owners, and fringe benefit desires of the owners among others. 

In summary, there are many factors that require careful consideration, and the sooner the issue is addressed, the more opportunities there are to avoid Sec. 280E disallowed expenses and plan for future growth. 

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For assistance, email info@B-Cconsulting.com and visit BC Consulting website

How Do I Pay My Tax Without A Bank Account?

So you have already done the impossible... you started a cannabis company, it is operating, AND it is making a tax profit. First off, congrats!

Now, how exactly do you pay that stinking tax bill? You don't have a bank account, and you can't just show up with a bag of cash and pay your tax right? Wrong! You not only can do it that way, you will have to do it that way without a bank account unless you are planning on going to 30 post offices to get 100 separate $1,000 money orders to pay that $100,000 tax bill. Doesn't sound like something you will do? That's because you won't, so let's get to reality here.

Remember that "taxes" aren't just one government body, we are dealing with multiple states with varying issues, tax rates (some have no income tax at all). Even though below we will talk about the Federal side of things (since it applies to you all), do not forget that you need to do this same thing for your State and Local taxes, as applicable in your jurisdiction.

1. Go online (https://apps.irs.gov/app/officeLocator/index.jsp) and find your nearest IRS Taxpayer Assistance Center (TAC). Not all TAC's are created equal, as some will not accept cash payments. When I search 97267 I get the below result

Find the right IRS Taxpayer Assistance Center (TAC)

2. Once I click to make an appointment, I am taken to a list of close centers, where I am then able to see which services they provide. This is where you can make sure they take cash payments.

Finding Services Provided by the local IRS TAC

WAIT! Look at this below, this TAC doesn't accept cash payments, good thing we checked!

Good thing we didn't just drive over there!

Good thing the Portland, OR IRS TAC accepts cash payments!

Perfect, they take cash so we will make our appointment here

Once complete, you will have an appropriate appointment setup at the correct center where you can pay your IRS tax balance.

Tips for your meeting:

1. Show up on time

2. Do NOT try to get cute and pay in pennies or they will turn you away (yes they can say no to your money).

3. You are going to be in a Federal building, leave your firearms, cannabis, or anything else at home or you may be in a Federal building for a lot longer.

4. ALWAYS walk out with a receipt showing the payment as being applied to your correct account and the correct tax year!