At Green Valley Tax Services, Inc, we are dedicated to helping you make the best decisions for your business. Our services include Tax Return Preparation, resolving Tax Issues, and Bookkeeping. When we consult with our business owner clients, one issue that comes up is which business entity is best for them, and it varies with each client.
Currently, there are 36 states and four territories that allow the use of medical marijuana products. For recreational use, there are 18 states and two territories. As more and more of the country slow adopts new laws regulating the use, growing, and sale of cannabis-related products, business owners are left in a bit of a lurch. While their respective states may be chomping at the bit to get a piece of this rapidly growing niche industry, the federal government still considers these products to be controlled substances and illegal.
That leaves little room for the gray area businesses to declare and pay taxes. With so much ambiguity between where they can legally park their money and how to stay compliant with local, state, and federal regulations, cannabis business owners are left confused.
The IRS Steps in to Help
In September of 2020, the IRS published a new web page related to those owners and operators of marijuana-related businesses. Everything from a small dispensary in Maine to a full-blown field of sweet Mary Jane in California is considered a business entity under this new guidance.
On this site, the IRS basically explains that if you are running a cannabis-related business, you still need to keep immaculate records of all cash transactions. Income from any source is taxable and taxpayers are generally required to file a tax return to report that income to the IRS. They go on to explain that cash payments for taxes are available for unbanked taxpayers by setting up an appointment with an IRS satellite office.
They also designate that any person receiving more than $10,000 in cash for a single transaction must file Form 8300 to declare that payment.
Where’s the Catch?
While the IRS is happy to accept your tax payment for your corporation involved in the marijuana industry, they will not give you as many business deductions. Businesses that traffic marijuana in contravention of federal or state law are subject to the limitations of IRC section 280E. This disallows US federal income tax deductions for companies other than the cost of goods sold. That places a great deal of liability on a cannabis business as they cannot deduct their building rent, electricity, or many other common operating expenses.
The only exception here is that companies may not reduce their expenses for operating costs, but can reduce their gross receipts by “properly calculating their cost of goods sold.” So if your business pays out high fees for acquiring or producing, then you could experience some tax relief.
What is Next?
While the idea of paying more than your fair share in taxes isn’t the most appealing idea, the concept that the IRS is officially recognizing cannabis-related businesses as somewhat legal entities is good. This normalization of the industry helps establish a history of the practical application of what used to just be working theory. In addition, it paves the road for future changes in federal law and shines a more positive light on small business owners.
Of course, navigating these strange new tax codes and corporate tax situations may still be challenging for some. That is why hiring a professional business service firm like Green Valley Tax Services to guide and consult with your business is a good idea. They have years of experience working with niche markets of all kinds and helping them meet their financial obligations while also ensuring all avenues of deductions and other balanced interests are completed.
Lillian Meyers CFP®, CDFA®, EA is a Tax Specialist, financial planner in the North Bay Area, California helping clients live their best life through the use of financial planning, investment management, and other sophisticated financial options.