Answers to Questions About Federal Taxes and Marijuana Businesses
Answers to Questions About Federal Taxes and Marijuana Businesses
The legality of marijuana or cannabis varies from one state to another. In some states, it’s legal to use marijuana for any purpose while in other states, it’s only legal for medical use. There are only a handful of states where it’s illegal to use marijuana in any way.
This has created tax challenges for businesses in the marijuana industry because they may be in compliance with their states’ laws — but the federal government considers them to be engaging in an illegal activity.
The IRS has released answers to some frequently asked questions that taxpayers have about marijuana businesses. Here are some of them.
Q. I operate a marijuana business in compliance with my state’s laws, but the federal government considers this an illegal activity. Do I have the same income and employment tax filing obligations as other businesses?
A. Yes. Income from any source is taxable. Recently, federal courts have consistently upheld IRS determinations that compliant marijuana businesses have taxable income. Similarly, marijuana businesses have no exemption from their employment tax obligations.
Q. What penalties or additions to tax could a marijuana business be subject to if adjustments are made during an income tax audit?
A. A marijuana business is subject to the same penalties and additions to tax as any other business, including: late filing and/or late payment penalties under the tax code, negligence and accuracy-related penalties and fraud penalties.
Q. Will the IRS propose penalties under the tax code for a marijuana business if an audit ends with the IRS adjusting the tax return of the business?
A. Penalties are considered on a case by case basis. However, the U.S. Tax Court has approved negligence penalties under the tax code when a marijuana business failed to keep adequate books and records and accuracy-related penalties when the business failed to show reasonable cause for significant omissions of income from their returns.
Q. I operate a business selling marijuana. Can I claim deductions to determine my taxable income?
A. The tax code disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of selling marijuana, even businesses operating in states that have legalized the sale of marijuana. The reason is because marijuana remains illegal under the federal Controlled Substances Act.
However, the tax code doesn’t prohibit a marijuana business from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing the marijuana that they sell, and those costs will depend on the nature of the business.
Accordingly, a marijuana business may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold.
Q. What information returns does a marijuana business need to file when a customer makes a cash payment more than $10,000?
A. Marijuana businesses, like other businesses, must report cash receipts from a single transaction (or related transactions) greater than $10,000. Form 8300, Report of Cash Payments Over $10,000 in a Trade or Business, is used to report such cash receipts.
Marijuana businesses must also:
- Develop policies and procedures reasonably designed 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 five years. Depending on the type of business, other regulatory requirements may exist regarding how long certain documents must be retained.