IRS Provides Outreach to State-Legal Marijuana Businesses
As more states legalize marijuana for medical or recreational use, the IRS has begun a Cannabis/Marijuana initiative to increase voluntary compliance with the tax law while also identifying and addressing non-compliance.
IRS Small Business/Self-Employed Division Commissioner DeLon Harris says federal tax compliance is "tricky" for legal cannabis businesses because, regardless of state law, marijuana remains a Schedule 1 controlled substance under federal law. That means a cannabis/marijuana business has additional considerations under the law, creating unique challenges for members of the industry. It also creates unique challenges for the IRS on how to support these new business owners and still promote tax compliance.
Marijuana Business Income and Expenses
Fundamental federal tax principles that state-legal cannabis businesses need to know include:
- 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. Expenses, such as advertising and overhead, are not deductible. However, the cost of obtaining the business inventory is deductible as the cost of goods sold.
In addition, Harris emphasized that cannabis businesses have no exemption from their employment tax obligations and, like other small businesses, they often need to make quarterly tax payments.
Cannabis Businesses are Cash-Intensive Businesses
The IRS understands that marijuana dispensaries are often cash-intensive businesses .
Some IRS Taxpayer Assistance Centers accept cash, but taxpayers must schedule an appointment to make cash tax payments. The number to call to request an appointment is 844-545-5640.
If a business in the cannabis/marijuana industry receives cash of more than $10,000 in a single transaction or in related transactions, it must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, within 15 days after receiving payment.
Commissioner Harris advises extra caution for marijuana businesses that use or accept cryptocurrency. He recommends working with a reliable exchanger to make sure all reporting and tax obligations are being met.
Warnings for Cannabis Businesses
Harris had two warnings for individuals who are trying to enter the legal marijuana business.
First, they should 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, they should be licensed as their location requires. Cannabis/marijuana businesses are highly regulated by state and municipal regulatory agencies.
Three Things Every Business Owner Should Do
Commissioner Harris 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 Businesses
Commissioner Harris notes that the IRS website 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