One such evolving and complex issue my organization has been focused on is the tax implications for the rapidly growing cannabis/marijuana industry. The specific rules and regulations regarding how it is taxed at the federal level provides the IRS an opportunity to promote voluntary compliance, not only through audits, but also through outreach and education. At last count, 36 states plus the District of Columbia have legalized marijuana for recreational or medicinal use, or both. These states, such as California, Washington and Colorado 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.
It's tricky from a business perspective, because even though states are legalizing marijuana and treating its sale as a legal business enterprise, it’s still considered a Schedule 1 controlled substance under federal law. That means a cannabis/marijuana business has additional considerations under the law, creating unique challenges for members of the industry. Specifically, these businesses are often cash intensive since many can’t use traditional banks to deposit their earnings. It also creates unique challenges for the IRS on how to support these new business owners and still promote tax compliance.
While IRS Code Section 280E is clear that all the deductions and credits aren’t allowed for an illegal business, there’s a caveat: Marijuana business owners can deduct their cost of goods sold, which is basically the cost of their inventory. What isn’t deductible are the normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses, to name a few.
I understand this nuance can be a challenge for some business owners, and I also realize small businesses don’t always have a lot of resources available to them. That’s why I’m making sure the IRS is doing what it can to help businesses with our new Cannabis/Marijuana Initiative.
The goal of this initiative is to implement a strategy to increase voluntary compliance with the tax law while also identifying and addressing non-compliance. I believe this will positively impact filing, payment and reporting compliance on the part of all businesses involved in the growing, distribution and sales of cannabis/marijuana.
How will we do it? Here are some of the strategic activities:
We’ll ensure training and job aids are available to IRS examiners working cases so they can conduct quality examinations (audits) consistently throughout the country.
We’ll make sure there is coordination and a consistent approach by the IRS to the cannabis/marijuana industry.
We’re going to find ways to identify non-compliant taxpayers.
We’ll collaborate with external stakeholders to increase an awareness of tax responsibilities to improve compliance.
And we’ll give taxpayers access to information on how to properly comply with the filing requirements.
I’m very focused on the success of this strategy because it’s very important for business owners to understand that under our nation’s tax laws, and specifically Internal Revenue Code 61, all income is taxable, even if someone is running a business that’s considered illegal under federal law.
I also want to point out that there is no difference in paying income taxes or employment taxes. You still must file your income taxes and you still have to file your employment taxes, and if it’s a cash-intensive business, you still have to make arrangements to pay your tax obligations.
This is a truly groundbreaking effort for our agency. I’m proud of the work my organization has done to provide much-needed educational tips, guidance and more information on our Marijuana Industry page, IRS.gov/marijuana, which includes links to information on:
IRC Section 280E
Cash payment options
Reporting large cash receipts
Keeping good records