Attorney-at-Law

COGS IN THE POTTER’S WHEEL

In Uncategorized on 06/18/2018 at 23:31

No, not Weller, Newcomb College, nor yet The Mad Potter of Biloxi, or any other whose works bring tears to David Rago’s eyes. Today we have another in the ongoing series examining cost of goods sold (COGS) as an offset to the earnings of the floggers of medicinal cannabis, Jesse M. Loughman and Desa C. Loughman, 2018 T. C. Memo. 85, filed 6/18/18.

Jess and Des have a Sub S. All their trafficking write-offs gets bounced; what COGS they could prove, they get. But they claim that their non-COGSnizable salary and wages are being double-taxed, as they can’t deduct them per Section 162 because of Section 280E, yet they have to put them on their 1040 MFJ.

“Petitioners contend that discriminatory treatment results from an S corporation’s being required to pay a reasonable wage as a salary to its officers pursuant to sections 3111, 3121, 3301, and 3306, as other entities are not subject to this reasonable wage requirement. The Code sections which petitioners refer to apply to the administration of employment taxes. The parties are not disputing the reasonableness of the wages. Rather, petitioners are contending that this reasonable wage requirement results in double taxation.” 2018 T. C. Memo. 85, at p. 8.

Tough, says Judge Kerrigan.

“If petitioners had hired a third party to perform the officer duties that they performed, and they paid that third party an amount equal to that included as wages in petitioners’ gross income, petitioners’ gross income would not include the third party’s wages from [pottery]. Petitioners would ultimately have less income, but they would not owe Federal income tax on the wages paid to the third party. However, section 280E would still disallow [pottery]’s wage expense deductions not attributable to COGS. Petitioners’ flowthrough income would be the same.  The application of section 280E to deny Palisades’ wage expense deductions is not discriminatory; it applies equally, regardless of whether petitioners themselves or a third party receives the wages.

“To the extent that petitioners believe they received disparate tax treatment as a result of organizing their marijuana business as an S corporation, petitioners were free to operate as any business entity and in other trades. Petitioners chose to operate [pottery] as an S corporation in the marijuana business. Petitioners are responsible for the tax consequences of their decision.” 2018 T. C. Memo. 85, at pp. 10-11.

Section 530 doesn’t help, because this isn’t an employee reclassification. Officers of a Sub S are statutory employees and can’t be reclassified.

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