The IRS Updated Tax Guidance on the Marijuana Industry… Here’s What You Need to Know

The Internal Revenue Service (IRS) recently released updated guidance on tax policy for the marijuana industry. As tax and accounting experts, we wanted to give you the highlights.

Since marijuana remains federally illegal, there’s been some confusion around the tax obligations of the cannabis industry.

Obligation to Pay Taxes

In this new tax guidance, the IRS clearly states that the marijuana industry still has an obligation to pay taxes and properly report transactions.

“Income from any source is taxable and taxpayers are generally required to file a tax return to report that income to the IRS. Many marijuana-industry businesses conduct transactions in cash, which need to be reported, like any other form of payment,” the IRS memo states.

The new guidance briefly covers:

• The rules for income reporting
• Cash payment options
• Estimating tax payments
• Keeping financial records

In an attached Frequently Asked Questions (FAQ) document, IRS explains 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 Marijuana Market Tax FAQ document also explains:

• Marijuana companies are eligible for payment plans if they’re unable to pay their taxes in full.
• Cannabis operations are subject to the same penalties as any other business that come about during an income audit.
• Instructions on how cannabis businesses that don’t have access to bank accounts can pay their tax bills using large amounts of cash.

Tax Benefits for the Cannabis Industry?

Tax benefits remains a hot topic in the cannabis industry. Businesses that traffic marijuana in contravention of federal or state law are subject to the limitations of Internal Revenue Code (IRC) Section 280E. This means that the industry is ineligible for most tax benefits extended to operators in other markets.

IRS code 280E “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.”

How the Marijuana Industry Can Get Some Tax Relief

While cannabis businesses aren’t eligible for most traditional deductions, they are able to calculate the cost of goods and get some tax relief.

“Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income,” IRS said.

The IRS document explained that “taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.”

“Accordingly, a marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471,” the IRS FAQ document said.

Looking Ahead

For now, the cannabis industry will continue to be at a tax disadvantage unless there’s a change in the federal legal status of marijuana, or statutory changes at the agency level. At Smith Patrick CPAs, we’ve worked with many operators in the cannabis market to develop the best structure for their businesses.

For more information on tax policies for the cannabis industry, contact us at 314-961-1600 or online.

About Smith Patrick CPA

Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.