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.
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.
Tips
Know your investors - There are thousands of people trying to get into the industry
legitimately; however, there are some pitfalls with investors that business owners need to be aware of to make sure their investors don’t cause more harm than good.
Ensure you’re licensed- Make sure you’re licensed for whatever your location requires. Cannabis/marijuana businesses are highly regulated by state and municipal regulatory agencies from a licensing, product development and movement perspective.
File and pay your taxes on time. - The Internal Revenue Code doesn’t differentiate between income derived from legal sources and income derived from illegal sources. It’s all income and is taxable and must be reported on your tax return. However, because it’s a Schedule I controlled substance, Section 280E of the tax code applies, even if the business operates in a state that has legalized the sale of marijuana.
Keep good Records - All records, such as receipts, canceled checks and other documents that support an item of income, a deduction or a credit appearing on a return should be kept regardless of whether they’re tracked by hard copy or electronically. It’s important for a cannabis business to maintain records for all expenses, even those that are not legally deductible at the federal level, because good, well-organized records make it easier to prepare a tax return, track expenses, substantiate items reported on tax returns, and help provide answers if a return is selected for examination.
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