In an interesting move, the IRS has released on September 27, 2020 a series of statements and information related to the burgeoning medical and recreational marijuana industry. The IRS acknowledged that the industry is now too large to ignore the lack of clarity surrounding the tax burden of businesses that are legal at the state level but are still illegally dealing with a schedule 1 substance at the federal level. The IRS in its recently published page entitled “Providing Resources to Help Cannabis Business Owners Successfully Navigate Unique Tax Responsibilities” stated that
36 states plus the District of Columbia have legalized marijuana for recreational or medicinal use, or both. These states…. provide tax guidance for businesses and we strongly encourage industry members to remain compliant with state taxes as well. And while there are 14 states that still ban cannabis use, we expect both unlicensed and licensed marijuana businesses to grow.
This recognition of the sheer volume of revenue being created in this industry and the projections for growth in the near future have forced the IRS to begin creating policies for tax compliance which can handle a continuously changing political landscape. The full link to the page published by the IRS can be found here.
The most notable policy change is that businesses in the medical or recreational marijuana industry are now able to write-off the cost of goods sold, which is essentially the purchase price of inventory. These companies still cannot write-off overhead expenses such as travel, advertising/marketing, or employee wages and salaries. This pertains to the IRS Code 280-E regarding business deductions and credits.
The IRS also acknowledges the limited banking solutions available to businesses in the legal marijuana industry, but states that all businesses must comply with IRC § 6050I regarding businesses accepting cash payments of $10,000 or greater. The IRS has published a “Marijuana Industry Frequently Asked Questions” page which lays out compliance and record keeping procedures for these businesses which are so often handling large volumes of cash. The IRS states that these companies must
Develop policies and procedures to identify and report cash receipts as required.
Include in their policies and procedures the requirement to obtain and verify certain customer information to ensure the information included on the report is accurate and complete.
Retain copies of forms filed for a period of five years.
States such as California, Colorado, and Washington have already put in place state guidelines for the marijuana industry to meet their tax burdens at the state level, including guidelines for the various business entities such as LLCs, S corps, C corps, and nonprofits.
The fact the IRS is making an effort to clarify these regulations and provide compliance frameworks and record keeping policies suggests that there is some awareness of the impending change in federally legal status of this industry. At the very least, the IRS is attempting to assuage the concerns of business owners that, as the marijuana market grows and legislation changes, there needs to be clear indicators of compliance to prevent wide scale audits and hang-ups for these companies moving forwards.
Operators within the legal marijuana industry must also deal with local level excise and state sales taxes. For instance, in New Jersey, cannabis cultivators, manufacturers, and retailers can be required to pay upwards of 2% of total goods sold to the city or municipality. With municipalities legally poised as the gatekeepers for licensure within the Garden State, a plan for compliance and knowledge of what the municipality is charging in terms of these taxes are essential when developing a business model and business license application. It should also be noted that the New Jersey CRC has stated that failure to pay municipal taxes, or even falling behind in payments, is grounds for the refusal to renew an annual business license. Having these record keeping and tax compliance strategies developed and in-place within your business model is necessary from the beginning of licensed operations to prevent fines, audits, and even the loss of licensure.
Partnering with experienced industry experts can make all the difference when creating a smooth, streamlined record of compliance which can make audits and inspections much less daunting. The Cannaspire Regulatory Compliance team can help you to implement record keeping strategies and develop forms and documents which will simplify navigating tax code between the local, state, and federal level. We will keep your company abreast of all the latest regulations and develop in-house audit strategies to keep your business ahead of the regulators. This means developing policies and procedures which ensure that your business is meeting its tax and compliance obligations, and is fully prepared to file with confidence at the end of each fiscal year.