The Internal Revenue Service (IRS) recently published comprehensive information on their website on tax policy for the cannabis industry, specifically the marijuana industry. The site includes information on several relevant topics, such as the Section 280E guide, tax returns, large cash payments, and more.
Although marijuana remains a banned substance under federal law, depriving those who work in the industry of certain U.S. federal benefits (for example, tax deductions for business expenses, excluding the cost of goods to businesses sold, bankruptcy, copyright, and trademark protection, etc.) must continue to pay taxes and report transactions correctly. The latest guidance provided by the IRS is designed to "help promote voluntary industry compliance."
So what does the IRS say about marijuana transactions and taxes?
Overview: what does the tax guide contain?
The new IRS website that deals with tax matters for marijuana businesses aim to educate business owners about their tax compliance responsibilities.
The page mentions that many companies in the cannabis industry conduct cash transactions, which must be reported like any other payment form. It also provides information on tax returns, cash payment options for taxpayers without a bank account, estimated U.S. federal income tax payments, and the importance of keeping solid records (for example, cash sourcing and tracking).
Also, the site includes several resources related to concerns about the cannabis industry. These features include Frequently Asked Questions (FAQs), information on paying taxes, and reporting individual cash transactions over $ 10,000.
Are revenues from the sale of marijuana subject to federal taxes?
Although still prohibited by U.S. federal law, 33 states have laws that legalize marijuana for medical or recreational purposes. As of 2020, the breakdown is as follows:
However, regardless of the legality of the product or business transaction, income tax purposes in the United States, income from any source is taxable, including income from the sale of marijuana or products related to marijuana. The new IRS website notes that federal courts have consistently upheld the ruling that income from the sale of marijuana, whether legal or illegal or not under state law, are subject to U.S. federal income tax in the United States of America.
What Does the IRS Say About Section 280E?
The Internal Revenue Service reminds "businesses that traffic marijuana in violation of federal or state law" that they are subject to the limitations of Section 280E of the Internal Revenue Code (IRC). As many in the industry know, Section 280E prohibits U.S. federal tax deductions for non-COGS business expenses, resulting in extremely high and efficient U.S. federal tax rates and tax-free debt. Based on the actual economic costs of operations, and have severely affected the marijuana-related businesses.
What is included in the frequently asked questions about the IRS marijuana industry?
As mentioned earlier, one resource the IRS has released with its new web pages is Frequently Asked Questions about the Marijuana Industry. On a large scale, frequently asked questions relate to specific information reporting and federal income tax reporting requirements for taxpayers involved in the manufacture, processing, sale, or distribution of marijuana products.
The IRS explains how the court rulings clarified that businesses must pay federal income taxes in the United States, even if they sell products that are considered illegal by state or federal law. It also explains that marijuana companies are eligible for payment plans if they cannot pay taxes in full. Also, it states that cannabis farms are subject to the same penalties as any other business during the IRS tax inspection.
This section also indicates that while Section 280E does not allow any deductions or credits from any amount paid or incurred for activities that violate federal drug laws (including those that sell marijuana in states that have legalized drugs for the sale of marijuana), section 280E does not prohibit a participant in the cannabis industry from reducing their gross income by correctly calculating the cost of goods sold to determine gross income. This generally means that taxpayers who sell marijuana can reduce their gross income from the costs of purchasing or producing the marijuana they sell. Those costs will depend largely on the nature of the business. In other words, while cannabis companies may not benefit from more traditional deductions, they can calculate the cost of goods sold and benefit from tax exemptions. For example, there are no advertising deductions, but there are costs of goods sold deductions.
What is the general conclusion of the IRS when adding these web pages?
While waiting for a change in federal marijuana status (e.g., classification as a CSA Tier 1 substance) or legal changes at the agency level, the cannabis industry will remain at a disadvantage when it comes to tax exemptions.
However, the inclusion of tax policy guidelines by the U.S. Federal Agency for Marijuana businesses is a positive step in recognizing the cannabis industry as important enough to warrant the establishment of a formal collection policy and delivery of taxes, as well as providing general information and answers to questions from taxpayers who have not yet received an answer. Posting a dedicated web page on IRS.gov is a significant sign of further scrutiny and potential developments to reduce taxpayer uncertainty to improve tax compliance.
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