3 Simple Solutions to Reduce Cannabis Related Income Tax Debt
Cannabis touching businesses get hit hard by many heavy tax bills from state and federal bodies.
Paired this with the fact that many operators are new to the tax game, and you have a recipe for disaster.
Oh, and cannabis is a controlled substance, which makes bankruptcy virtually impossible.
So yes, if you ended up behind on taxes, you may have found yourself financially underwater. Insolvent. Unable to pay these bills.
So now what?
Firstly, make sure the taxes assessed are accurate. Sometimes, they are just wrong.
For example, if you have a large state income tax bill assessed to a 280E non-conformant state, then you may want to have that reassessed, as it may be overstated.
But even so, that IRS debt will be high if you’re behind on it.
So what can you do if your income tax ball is through the roof and piling up?
Well, you have a few options:
Sell equity and pay the debt with it
Refinance it through third parties
Negotiate the debt with the IRS
Equity for Freedom – Paying the Bills by Selling the Business
The first option is the most obvious. You can sell part or all of the business to somebody and use the proceeds to pay the debt.
Depending on your tax structure, this will have different forms. And depending on your tax debt, you may opt for different types of arrangements.
As I write this, most businesses who have found themselves in this problem are just selling their business entirely to stop the bleeding. This is one reason you’ll see cannabis dispensaries selling on the fair market for $1.
But considering that we may be rounding home base on rescheduling, I don’t recommend an approach like this unless it’s absolutely necessary.
Debt Restructuring and Relief
The general way this is done is via receivership.
What this entails is having somebody manage the business and liquidate the assets of the business for you in order to pay creditors.
Since bankruptcy isn’t in the cards for cannabis companies, this is a decent strategy, but it can be costly.
The other thing you can do is borrow money and use it to pay off the tax debt. This is essentially a game of trading masters, but it can be viable, depending on the terms you negotiate.
Negotiate with the IRS – Pay What You Can
If all else fails, the IRS has one desire. It wants to collect all that it can.
It does not profit from seeing you fail. Like any other business, it breathes cash.
Therefore, it will be looking to collect all it can from you. No more, and no less.
And sometimes that is more than you have. And that’s ok. You just prove this and then pay what is possible and feasible.
If this is done correctly, they will generally forgive the remainder of the debt in exchange for collecting what they believe is reasonable to expect.
Summary and What to Do Next
These are the 3 most intuitive ways that I’ve found for managing cannabis related tax debt.
You can sell the business, or part of it…
Enter receivership, or refinance it…
Or negotiate the debt with the taxing authority…
And I hope you found this valuable.
Oh, and if you’re looking for help reducing or removing your tax debt with the IRS or otherwise, feel free to book a call with me and we can strategize the best way to get you there.
