Tax considerations surround production, sale and use at state / federal level
Many states have legalized marijuana for medicinal purposes, and a growing number of states have now legalized marijuana for recreational use. Additional expansion is possible in the November elections with ballot initiatives in three states. Yet, at the federal level, marijuana remains an illegal controlled substance. For tax purposes, this prevents cannabis businesses from deducting many of their business expenses while the income received is taxable, resulting in a much higher effective tax rate than that imposed on other businesses. Several cannabis businesses have challenged this treatment in court but have generally lost those challenges.
- The Internal Revenue Service (IRS) has recently posted a webpage specific to the marijuana industry providing tax guidance and answers to frequently asked questions to industry participants
- States may impose excise taxes, retail sales taxes, and license fees on various elements of the marijuana industry, including growing, production, distribution, and retail sale
- The IRS taxes industry participants on gross sales, with deductions only allowed for cost of goods sold
- Efforts to segregate the activities into two separate businesses and allocate expenses to the non-cannabis business have only been successful where the businesses are very separate, and one is not dependent on the other
- IRS guidance addresses payment options for paying in cash since many marijuana businesses have trouble obtaining banking accounts, including estimated tax payments
- The IRS guidance also addresses record keeping requirements
- Efforts continue in Congress to legalize marijuana at the federal level, but they have so far been unsuccessful
Listen to our Tax Talks podcast on the subject
As part of its Tax Talks podcast series, Wolters Kluwer Tax & Accounting recently posted a podcast on the tax treatment of marijuana at the state and federal level.
To read the full press release, click here.
Experts offer guidance
Tax expert Mark Luscombe, JD, LL.M, CPA, principal federal tax analyst at Wolters Kluwer Tax & Accounting, and Carol Kokinis-Graves, JD, attorney and senior state tax analyst at Wolters Kluwer Tax & Accounting, can help explain the various tax issues associated with the cannabis industry.
To arrange an interview with Mark Luscombe and Carol Kokinis-Graves, or other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact: