The Internal Revenue Service (IRS) on Thursday released updated guidance on tax policy for the marijuana industry, including instructions on how cannabis businesses that don’t have access to bank accounts can pay their tax bills using large amounts of cash.
Because marijuana remains federally illegal, the industry is largely deprived of tax benefits extended to operators in other markets—but it still has an obligation to pay taxes and properly report transactions, IRS said.
“A key component in promoting the highest degree of voluntary compliance on the part of taxpayers is helping them understand and meet their tax responsibilities while also enforcing the law with integrity and fairness to all,” the new memo states. “Businesses that traffic marijuana in contravention of federal or state law are subject to the limitations” in IRS code.
Income from any source is taxable, and taxpayers are generally required to file a tax return to report that income. #IRS provides general guidance for taxpayers in the marijuana industry: https://t.co/POESTOvT7H pic.twitter.com/f4y1Q3KlIn
— IRS #COVIDreliefIRS (@IRSnews) September 11, 2020
This update appears to be responsive to a Treasury Department internal watchdog report that was released in April. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”
The new guidance briefly covers the rules for income reporting, cash payment options, estimating tax payments and keeping financial records.
In an attached Frequently Asked Questions document, IRS explains how court rulings have clarified that businesses are required to pay taxes even if they’re selling products considered illegal under state or federal law. It also explains that marijuana companies are eligible for payment plans if they’re unable to pay their taxes in full. Further, it states that cannabis operations are subject to the same penalties as any other business that come about during an income audit.
A topic of particular interest for the marijuana market concerns tax benefits. An IRS code known as 280E “disallows all deductions or credits for any amount paid or incurred in carrying on any trade businesses that consist of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.”
“Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income,” IRS said, adding that “taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.”
“Accordingly, a marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471,” it said.
In other words, while cannabis businesses aren’t eligible for most traditional deductions, they are able to calculate the cost of goods and get some tax relief.
But pending a change in the federal legal status of marijuana, or statutory changes at the agency level, the cannabis industry will continue to be at a disadvantage. That would change if Congress passed a marijuana legalization bill like the one the House is set to vote on later this month.