For the past year, the Internal Revenue Service (IRS) has directed its attention to the cannabis industry– in a helpful way! This includes promulgation of cannabis tax guidelines as well as webinars and public forums dedicated to tax compliance for marijuana businesses (together, the “Guidelines”). The stated IRS goal here is “to positively impact filing and paying and reporting compliance on the part of all cannabis businesses to keep audits to a minimum.”
This IRS effort began last fall when the federal agency added a “Marijuana Industry” page to its website, dedicated to tax policy for cannabis companies. Since then, the IRS has added information and resources to this page, including an FAQ and tips covering a wide range of information. This includes income reporting, Internal Revenue Code (IRC) Section 280E guidance, cash payment options, and good recordkeeping.
Marijuana-Related Income Is Taxable Income
Although marijuana remains a Schedule I substance under the federal Controlled Substances Act (CSA), cannabis-related income is taxable under Section 61 of the IRC. Indeed, federal courts have consistently upheld that income derived from state compliant as well as illegal marijuana business activities are subject to U.S. federal income tax. See Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015); Feinberg v. Commissioner, 916 F.3d 1330 (10th Cir. 2019); and Beck v. Commissioner, T.C. Memo. 2015-149, to name a few.
Some Marijuana-Related Expenses Are Deductible
The Guidelines discuss the limitations to which marijuana companies are subject pursuant to Section 280E of the IRC. In a nutshell, Section 280E denies deductions and credits for amounts paid or incurred in carrying on the trade or business of trafficking controlled substances (within the meaning of Schedules I and II of the CSA) in violation of federal or state law. Consistent with marijuana’s classification as a Schedule I controlled substance, Section 280E bars cannabis taxpayers from taking tax deductions and claiming tax credits attributable to their businesses.
Nevertheless, cannabis taxpayers subject to Section 280E may deduct their cost of goods sold (COGS) when determining their gross income, in accordance with Section 471 of the IRC. In its Guidelines, the IRS acknowledges the confusion surrounding Section 218E and explains that while normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses are not deductible, the cost of obtaining the business inventory is deductible.
This is an important statement from the IRS. Until the release of its Guidelines, it had offered little to no tax guidance about the application of Section 280E. This uncertainly denied many cannabis taxpayers the opportunity to structure their business operations in a way that mitigates the impact of Section 280E, with any certainty.
Cash Payment Options and Large Cash Amounts
Another strong emphasis in the Guidelines pertains to cash. Specifically, the Guidelines recognize the challenges faced by the cannabis industry in gaining access to banking services. The Guidelines affirms that the IRS makes cash payment options available for unbanked taxpayers.
In addition, the IRS reminds cannabis stakeholders of the need to reports cash receipts exceeding $10,000 in cash, in a single transaction and/or related transactions. The protocol requires filing Form 8300 within fifteen days following receipt of said payment. Operators also have an obligation to develop procedures reasonably designed to identify and report cash receipts, obtain and verify certain customer information and retain copies of forms filed for a period of five years.
The IRS “Cannabis/Marijuana Initiative”
In addition to promulgating these Guidelines, the IRS is launching a “Cannabis/Marijuana Initiative” to to train tax officials. The goals are to: 1) properly and consistently conduct audits within the industry, 2) work with stakeholders to ensure tax compliance, and 3) help identify and penalize non-compliant actors.
The IRS Really is Here to Help
The IRS cannot change marijuana’s status under the CSA, or repeal IRC Section 280E. Only Congress can do that.
And while Congress is struggling to legalize marijuana, federal agencies like the IRS are recognizing the legitimacy of this industry. These agencies are preparing for an inevitable policy shift (eventually) at the highest level of government. By leading these outreach efforts with its cannabis tax guidelines, the IRS conveys a desire to reduce tax uncertainties that have been plagued the industry.
For years now, cannabis taxpayers have been unjustly penalized for the discrepancy surrounding the legality of marijuana under state and federal law by being subjected to incredibly high federal income tax rates and cash tax liabilities that don’t align with their actual costs of operations. At least they now have the same type of guidance and services afforded to non-cannabis-related companies.
It’s nice to see that while much remains to be done to give the cannabis industry the chance it so-deserves to succeed and follow its course, the times they are – finally – a-changin’.