The U.S. cannabis industry has been in a precarious position for the past few years. Although more than thirty states have legalized cannabis sales in some form, the plant remains illegal at the federal level. So, although businesses can sell cannabis as long as they obtain a state license, federal law considers the business illegal. Despite this, marijuana businesses are required to pay federal tax and because marijuana remains illegal at the federal level, they are denied access to tax benefits.
Early this month, the Internal Revenue Service (“IRS”) released updated guidance on tax policy for the nascent marijuana industry. The agency acknowledges that although operators in the industry still have an obligation to pay taxes, they are denied tax benefits extended to operators in other markets. “A key complaint in promoting the highest degree of voluntary compliance on the part of taxpayers is helping them understand and meet their tax responsibilities while also enforcing the law with integrity and fairness to all. Businesses that traffic marijuana in contravention of federal or state law are subject to the limitations in IRS code.” says the IRS in the new memo.
The updated guidance covers the rules for income reporting, estimating tax payments, and keeping financial records as well as instructions on how cannabis businesses that don’t have access to banking services can pay their tax bills in cash. Additionally, the IRS explains in an attached Frequently Asked Questions document how court rulings have clarified that businesses are required to pay taxes even if they’re selling products considered illegal under state or federal law. The agency further states that businesses that are unable to pay their taxes in full are eligible for payment plans and that marijuana businesses are subject to the same penalties as any other business that come about during an income audit.
Marijuana businesses will be happy to know about IRS code 280E which “disallows all deductions or credits for any amount paid or incurred in carrying on any trade businesses that consist of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act. Section 280e does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods to determine its gross income.”
“Taxpayers who sell marijuana may reduce their gross receipts by the costs of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.” This means that although cannabis businesses aren’t eligible for most traditional deductions, they can calculate the cost of goods and get some tax relief.
Experts say that while the document from the IRS does offer a window through which cannabis companies can get some relief, companies like Pure Extract Technologies Inc. would be happier with an arrangement that sees them getting equal treatment with other legal businesses in different states.
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