Finding out the Worth of a Cannabis Business—Before the IRS Does
During William Fowler’s nearly 20-year employment with the IRS as a Federal Commissioned Officer, he developed a process to assist with more accurately valuing businesses and corporations being audited. By implementing the process and simply asking the right questions, along with his expertise in valuation, he increased the IRS’s western region’s receipts by over 500% in one year alone.
But now, the man who modernized the IRS business valuation process, to the chagrin of some of the largest net-worth entities in the United States, has partnered with Nevium to help businesses capture additional business value while minimizing their federal tax burden, particularly in the cannabis industry.
Cannabis Industry, Take Note
Businesses that don’t properly substantiate their write-offs and deductions will always be at risk for triggering an audit from the IRS, but the legal landscape facing some emerging industries presents unique complexities for which they will need to be prepared. Take for instance, the cannabis industry. While the sale of marijuana is legal in some states but still against federal law, these businesses operate in a financial gray area.
“The IRS is determined to wade through this ambiguity to tax cannabis businesses to the fullest extent,” says Fowler. “They have a cannabis audit team ready to take on the industry.”
IRS Code Section 280E was created to address the write-off of expenditures associated with running marijuana businesses, which cannabis businesses must file because, although these businesses aren’t recognized as legal by the federal government, marijuana is still classified as a Schedule I drug under the federal Controlled Substances Act. Section 280E essentially eliminates the normal business expenses a non-cannabis business is allowed to write off.
“When cannabis plant-touching businesses submit their tax returns, the IRS will be looking to see if the business is operating under legal guidelines or not, very likely through an audit,” says Fowler. “In fact, the taxpayer should expect a ‘full’ audit because as far as the IRS is concerned, the owner is operating a business that is considered illegal under federal laws.”
An audit could trigger inquiry into the Cost of Goods Sales ledger, as well as cross-checking expenses and revenues to their source, among many other areas of the business’s financials. In the event the IRS audits a cannabis plant touching business, the owner would be wise to have their financials readily available with complete fact substantiated.
The IP Connection
In addition to scrutinizing a business’s transactions and expenses, the IRS would also look to see if the business has had its IP portfolio and other intangible assets appraised in order to determine if the business is allocating the correct amount to amortize expenses.
“The IP portfolio is also an area of opportunity, however,” says Fowler. “For cannabis entrepreneurs, the IP portfolio is basically the most opportuneway to compensate for the taxing effect of 280E, and the IRS will not be able tax that portion of revenues that are not attached to the cannabis revenues as it applies to the IRC 280E issue.
“The potential for valuable IP in a cannabis business might surprise you,” he says. “New strains, approved trademarks, unique graphics, cultivation rights, etc., can all provide nontaxable revenue as it applies to IRC 280E.”
As in any new opportunity, such as the cannabis industry, there are risks and rewards. With Fowler on board, Nevium has a roadmap to help business owners, from growers to sellers, understand their business and IP value, minimize their federal tax burden, and enjoy more of the rewards of cannabis entrepreneurship.
IRS 280E penalizes traffickers of controlled substances by denying deductions from gross income for business expenses. Therefore, an after-tax discounted cash flow analysis is more appropriate for valuing plant touching cannabis businesses if the analysis has the correct segregation between state and federal taxes. It takes little imagination to discern that the denial of ordinary business deductions greatly impacts those doing business within the cannabis plant touching industry.
Arguably the most valuable but least understood intangible asset are brands. Brand: marketing-related intangible asset including but not limited to names, terms, signs, symbols, logos and designs, or a combination of these intended to identify goods, services or entities, or a combination of these, creating distinctive images and associations in the minds of stakeholders, thereby generating economic benefits/values. – ISO 10668
Nevium’s article “Valuing a restaurant’s vibe protects its IP for sale or franchise” was published in Restaurant Dive today. Click over and take a look.
Nevium provides C-level executives and IP owners with valuations and IP strategies that leverage IP to enhance financial performance. Nevium uses IP valuation tools to connect IP to financial performance, enabling greater leverage of IP assets.
Benefits:
More sales, lower costs, and greater profits
Identify under-utilized IP
Uncover new protection and registration needs
Deeper understanding of the benefits of IP
Strategy Based on IP Valuation
As IP valuation experts, Nevium develops IP Strategies based on IP valuation tools. We calculate and communicate how patents, trademarks, copyrights, trade secrets and brands contribute to financial performance. Nevium’s IP Strategy services focus on translating how IP and intangibles impact the company’s bottom line, enabling IP owners and managers to identify and develop business strategies that leverage the company’s proprietary assets and enhance financial performance.
IP strategies can include leveraging brands and trademarks to access new markets or new territories, leveraging patents and proprietary technologies to optimize product pricing, and mapping IP portfolios to identify acquisition and divestiture opportunities. A thorough valuation-based review of an IP portfolio often uncovers opportunities to maximize capital investments and identifies business risks.
Using IP Valuation
Valuation of IP assets provides a benchmark and metric allowing Boards, IP Owners, Executives and In-house IP managers to demonstrate how and where their IP is making a difference. In other words, how their IP is influencing profits, impacting enterprise valuation and creating growth opportunities.
Nevium’s IP valuation clients gain a deeper understanding of their IP portfolios, quantify how their IP is contributing to financial performance and know which assets are being leveraged to drive growth and greater valuations.
Our valuation clients often realize some IP assets are contributing more than previously thought, while other asset groups are not generating expected returns and could be leveraged in other ways. We have identified assets that are key to financial performance that lacked sufficient legal protection and identified opportunities to sell or license other assets.
Nevium’s Valuation Tool Kit
Nevium’s valuation toolkit features a range of IP valuation tools, including our apportionment matrix and profit apportionment valuation model. The apportionment analysis is a four-step process that includes a business’ enterprise valuation, identification and grouping of key IP assets, a valuation of each of the business’ primary revenue-generating activities and a valuation of each identified asset bundle. Our valuation reports provide a multi-level view of the activities and assets driving the overall value of the organization.
Our valuation analyses are supported by industry and market research and valuation benchmarks. Our reports and presentations are designed to inform, communicate and provide new insights for business owners, executives and managers.
Nevium Intellectual Property Consultants
Nevium provides the IP industry with a visionary approach to calculating and communicating the financial impact of trademarks, copyrights, patents, brands and intangible assets. Our trailblazing techniques use advanced IP tools that go beyond the numbers. For IP litigators, Nevium provides expert damages testimony that combines our knowledge of Internet and social media analytic tools with accepted methodologies and concise narratives. We also provide C-level executives and IP owners with valuations and IP strategies focused on leveraging IP to enhance financial performance.
Nevium has worked with a wide range of clients across many industries. Often our IP valuation assignments become long-term partnerships where we advise our clients on licensing, business expansion, product pricing and overall business strategy. We work closely with in-house and outside counsel to ensure that IP business strategies work in conjunction with IP legal strategies.
