As more states legalize marijuana for medical or recreational use, the IRS is providing new resources to help cannabis businesses comply with federal tax laws. The Commissioner of the IRS Small Business/Self-Employed division, Eric Hylton, is spearheading a public outreach effort to spread the news about the IRS marijuana tax initiative.
Federal tax compliance is complicated for legal cannabis businesses because, regardless of state law, marijuana remains a Level 1 controlled substance under federal law. However, the IRS wants to be realistic about the changing legal landscape.
In a recent webinar, Commissioner Hylton recognized that most taxpayers, including most legal cannabis businesses, want to comply with federal tax law, but may find it challenging to do so. He stressed that the IRS wants to help.
Marijuana Business Income and Expenses
Hylton identified two fundamental federal tax principles that state-legal cannabis businesses need to know:
- All income, even income from an illegal activity, is included in taxable income.
- Expenses from an illegal business are not deductible.
- However, even an illegal business can deduct cost of goods sold.
For example, the owner of a cannabis business must include business income in taxable income. The cost of obtaining the business inventory is deductible as the cost of goods sold. However, other expenses, such as advertising and overhead, are not deductible.
This distinction can be confusing for many small business owners, but Hylton emphasized that the IRS wants to help cannabis business owners understand and comply with the federal tax rights and obligations.
Cannabis Businesses are Cash-Intensive Businesses
The IRS understands that marijuana dispensaries are often cash-intensive businesses. To accommodate this reality, owners may make an appointment with an IRS Tax Assistance Center to pay employment and income tax payments in cash.
Commissioner Hylton advised extra caution for marijuana businesses that use or accept cryptocurrency. He recommended working with a reliable exchanger to make sure all reporting and tax obligations are being met.
Warnings for Cannabis Businesses
Hylton also had two warnings for individuals who are trying to enter the legal marijuana business.
First, they should still be on the lookout for nefarious characters who might use a relatively small initial investment to end up in control of the business and use it for laundering illegal narcotics income. Similarly, a legal marijuana business must be sure that it isn’t being used to market or distribute cannabis in states where it is not yet legal.
Second, some marijuana business may falsely claim to be legal and licensed. He noted one such business had operated successfully until the owners failed to pay their income and employment tax liabilities.
On a related note, Hylton discussed the need for legal dispensaries to comply with all tax reporting requirements, including filing Form 8300, Report of Cash Payments Over $10,000 Received In a Trade or Business, when they receive more than $10,000 in cash in a single transaction or in related transactions.
Three Things Every Business Owner Should Do
Commissioner Hylton explained three things that a cannabis business, like any business, should do to ensure compliance with federal tax laws:
- Make sure returns and reports are filed on time.
- Make sure taxes (including employment taxes) are paid on time.
- Make sure records are accurate and complete.
Other IRS Resources for Legal Marijuana Business
Many of Commissioner Hylton’s point are reiterated on the IRS website, which includes a dedicated page for the marijuana industry. Resources available there include:
- Discussions of taxable income and deductible expenses from an illegal business
- Tax payment obligations and options
- Handling and reporting large cash payments
- Accurate recordkeeping
- Marijuana industry FAQs
- Cash Intensive Businesses Audit Technique Guide
By Kelley Wolf, JD, LLM.