280E & Tax · From the archive

Tips for Avoiding an Audit

Harry's original guidance, March 2017

What follows is the original article as Harry wrote it in 2017 — one of the first posts ever published on this site. The fundamentals haven't aged a day, which is rather the point. A 2026 update for cannabis operators follows at the end.

Self-employed business owners already have one of the biggest targets on their backs from the IRS. It pays to take a few extra steps to minimize your chances of getting bitten if your return is selected for audit. The main goal here is to keep adequate documentation so you can maximize your deductions with confidence. Nobody is saying to break any laws — we just want to make sure you get every deduction possible, and the best way to do that is to be ready for questioning before the tax return is filled out. The IRS is more concerned with the folks who cannot back up their deductions than the ones who can.

The original checklist

Auto expenses: keep a mileage log if possible; if not, your appointment calendar is proof of meetings and therefore miles driven. Charge all fuel purchases to your business account.

Advertising: keep invoices from advertisers, plus a copy of the ad placed or samples of promotional items purchased.

Equipment and assets: keep receipts and proof of purchase — your accountant needs these at year end. Scan loan and lease agreements and email yourself a copy the day the deal is signed, so a permanent electronic copy exists.

Meals: record who you met with and what business you discussed on the back of the receipt.

Subcontractors: don't pay a dime until you have a W-9. No W-9, no 1099 — the deduction can be disallowed, or payments re-characterized as payroll and hit with back payroll taxes.

When in doubt, run it through the business account: it is far easier to reclassify a business purchase as personal than to dig through personal accounts hunting for business expenses.

Reconcile your books — or pay someone to do it. Without formal accounting training, deductions and opportunities get missed.

Pay your taxes!! It sounds like a no-brainer, but ignoring tax liabilities is the easiest way onto the IRS's radar — and once they find non-compliance, they have an open window to dig further.

Neat stack vs. box of crap: if you are selected, showing up with papers already sorted and organized makes the whole process less stressful. If selected, expect to supply bank statements, general ledger, balance sheet, income statement, tax returns, and supporting documents — leases, loans, amortization schedules.

If you get a notice, call a professional before calling the IRS and discussing your situation. Prepared taxpayers find that an audit is not a problem at all: your deductions stick, and the IRS spends minimal time in your books before moving on.

The 2026 update: what changes for cannabis

Nine years on, every word above still applies — and cannabis operators need one more layer on top of it. Under Section 280E, most of the deductions Harry described are unavailable to a plant-touching business; the documentation battle moves to cost of goods sold instead. The same discipline applies to a different target: contemporaneous labor splits between production and everything else, allocation methodologies written down and applied consistently, and a seed-to-sale system that reconciles to the ledger every month.

The 'neat stack' principle is unchanged. A cannabis examination centers on whether your §471 capitalization holds — and the operator who hands over a documented methodology and clean reconciliations gets a short audit. The one with a box of crap does not. Some things really don't age.

This article is general information, not tax advice.