Tax & AccountingOctober 05, 2020

Taxation and the cannabis industry

Wolters Kluwer Tax & Accounting looks at tax issues surrounding the growing legality of the production, sale and use of marijuana at the state level while it remains a controlled substance at the federal level.

What: 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
Why: 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.

Who:
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.

Contact: 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 Bart Lipinski.

About Wolters Kluwer Tax & Accounting

Wolters Kluwer Tax & Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy, and efficiency. 

Wolters Kluwer Tax & Accounting is part of Wolters Kluwer (WKL), a global leader in professional information, software solutions, and services for the healthcare; tax and accounting; governance, risk and compliance; and legal and regulatory sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with advanced technology and services.
About Wolters kluwer

Wolters Kluwer (WKL) is a global leader in professional information, software solutions, and services for the health, tax & accounting, governance, risk & compliance, and legal & regulatory sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services.