The Internal Revenue Service\u2019s (IRS) Taxpayer Advocate is reminding people of the unique financial challenges that state-legal marijuana businesses face under federal prohibition.<\/p>\n
In a blog post published on Tuesday, the independent agency under IRS explained that cannabis companies are still obligated to pay federal taxes\u2014but they\u2019re barred from deducting most expenses that other industries can claim because the federal government considers marijuana a strictly controlled substance.<\/p>\n
National Tax Advocate Erin Collins didn\u2019t call for a specific policy change, but she did acknowledge efforts in Congress to enact legalization, or at least protect banks that work with state-legal businesses from being penalized by federal regulators.<\/p>\n
The purpose of the new post was to \u201cshed some light on the frustrations encountered by a growing segment of the business taxpayer population\u2014the growers, distributors, and retailers of marijuana-related products\u2014and educate them on federal tax law,\u201d the agency said.<\/p>\n
\u201cThere are significant federal tax-related consequences for businesses engaged in the \u2018trafficking\u2019 of marijuana, even in states that have legalized (or de-criminalized) the use of it,\u201d the tax advocate wrote, adding that a federal tax provision known as 280E specifically precludes cannabis businesses from claiming most deductions.<\/p>\n
Cannabis companies are able to make deductions for the cost of goods sold, which can \u201coffset their gross receipts,\u201d but that still means that businesses in the industry \u201cend up paying federal taxes on\u00a0gross profit<\/em>\u00a0rather than\u00a0net income<\/em>.\u201d<\/p>\n The IRS tax advocate gave a hypothetical example to illustrate what that distinction means:<\/strong><\/p>\n Example.\u00a0<\/strong>A marijuana retailer has gross revenue of $1,000,000. It spent $750,000 on COGS and incurred another $200,000 in business expenses (which are nondeductible per Section 280E). Assuming a 30 percent effective tax rate, the marijuana retailer has a federal tax burden of $75,000 ($250,000 taxable income x 0.30). Had the business been allowed to deduct the other $200,000 in business expenses, its tax burden would have been reduced to $15,000 ($50,000 taxable income x 0.30).<\/p>\n \u201cNot only is the marijuana retailer effectively taxed at a higher rate, it may take longer for a marijuana-related business to recoup its start-up expenses and turn a profit than other businesses,\u201d the post says.<\/p>\n Adding to the complexity of operating a marijuana business under the current federal policy, cannabis businesses also face burdens in paying their taxes because it needs to be deposited in cash at specific IRS sites that can handle the cashflow.<\/p>\n The tax advocate cited comments from Treasury Secretary Janet Yellen<\/a>, who has said on several occasions that a bipartisan bill to safeguard financial institutions that work with state marijuana markets could help simplify tax collection for IRS.<\/p>\n \u201cRegardless of your personal or political views, or whether this disparate treatment is fair or not, taxpayers involved in the production, distribution, or sale of marijuana should be aware that there are significant federal income tax challenges that apply to this industry and understand the federal tax consequences,\u201d the post says.<\/p>\n \u201cUntil Congress changes the law removing marijuana from the definition of a Schedule I controlled substance under the CSA, these businesses are not entitled to claim deductions and expenses like other businesses and need to understand the federal tax consequences in conducting its business,\u201d Collins concludes.<\/p>\n While the office doesn\u2019t specifically endorse any proposals to reform federal marijuana laws, it\u2019s notable that the IRS body is working to promote tax education in the industry and tracking potential solutions.<\/p>\n Collins, the tax advocate, previously misstated IRS policy on tax deductions for medical cannabis<\/a>, saying during a C-SPAN appearance in February that there was a \u201cmedical deduction\u201d that could apply to marijuana patients. But she clarified in a statement to Marijuana Moment that that isn\u2019t actually the case.<\/p>\n The new blog post<\/a> also reiterates that \u201cbecause marijuana is not a federally recognized course of medical treatment, individual taxpayers are prohibited from claiming associated expenses as itemized deductions on Schedule A of their Form 1040 tax return.\u201d<\/p>\n IRS, which falls under the Treasury Department, has made clear that it doesn\u2019t have discretionary authority to adopt policies that permit marijuana-related deductions while cannabis remains illegal under federal law. But the agency has taken steps to clarify tax policy for state-legal marijuana businesses.<\/p>\n De Lon Harris, commissioner of examination at the IRS Small Business\/Self Employed (SB\/SE) Division, recently spoke about tax-related issues in state-legal marijuana markets in a webinar hosted by PBC Conference. He said that while cannabis remains federally illegal, businesses that deal in the controlled substance\u00a0must still file federal taxes, and IRS is here to help<\/a>.<\/p>\n Harris also provided\u00a0tips for marijuana businesses on tax compliance<\/a>\u00a0in a blog post published in September. And IRS separately hosted a forum in August\u00a0dedicated to tax policy for marijuana businesses<\/a>\u00a0and cryptocurrency.<\/p>\n Another top IRS official who\u2019s since left the agency also\u00a0participated in a PBC Conference webinar<\/a>\u00a0in 2020. He offered similar recommendations to cannabis businesses, while also recognizing that the legalization movement will potentially succeed in ending prohibition in \u201call states.\u201d<\/p>\n Former Treasury Secretary Steve Mnuchin, during the Trump administration, repeatedly addressed the cannabis issue<\/a>, saying the current policy conflict creates \u201csignificant problems\u201d for IRS and financial regulators. It \u201ccreates significant risk in the communities for collecting this amount of cash. It\u2019s problematic,\u201d he said last year.<\/p>\n Advocates Say Talks With Justice Department On Overdose Prevention Sites Case Have Been \u2018Productive,\u2019 As Court Extends Deadline<\/a><\/p>\n<\/blockquote>\n\n The post IRS Official Addresses Marijuana Industry\u2019s Financial Challenges And Congressional Solutions<\/a> appeared first on Marijuana Moment<\/a>.<\/p>\n
The Internal Revenue Service\u2019s (IRS) Taxpayer Advocate is reminding people of the unique financial challenges that state-legal marijuana businesses face under federal prohibition. In a blog post published on Tuesday, the independent agency under IRS explained that cannabis companies are still obligated to pay federal taxes\u2014but they\u2019re barred from deductingContinue Reading<\/a><\/span><\/p>\n","protected":false},"author":458,"featured_media":0,"comment_status":"false","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[18,81],"tags":[],"_links":{"self":[{"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/posts\/54670"}],"collection":[{"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/users\/458"}],"replies":[{"embeddable":true,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/comments?post=54670"}],"version-history":[{"count":1,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/posts\/54670\/revisions"}],"predecessor-version":[{"id":54671,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/posts\/54670\/revisions\/54671"}],"wp:attachment":[{"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/media?parent=54670"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/categories?post=54670"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/tags?post=54670"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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\nRead More: IRS Official Addresses Marijuana Industry\u2019s Financial Challenges And Congressional Solutions<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"