There has been a lot of complications with taxation in the cannabis industry. Growers continue to struggle to keep up with regulations while illegal growers reap the benefits of a lucrative industry. Despite having little power to improve tax requirements, the IRS gives small cannabis businesses advice for success.
As the marijuana industry continues to grow, the IRS is taking steps to ensure that its officers are prepared to handle cannabis businesses and educate them on their tax obligations. The motivation for this is to give auditors and examiners the tools they need to provide fair and accurate evaluations of these businesses. Without a fair assessment, cannabis businesses may not be given a fair shake when it's time to audit taxes.
Cannabis taxes also work differently than standard taxes. For example, profits from marijuana sales don't qualify for traditional deductions or credits. This is because a statute known as 280E doesn't allow cannabis businesses to reduce their gross receipts by calculating the cost of goods sold.
The IRS is also adjusting to new terminology for cannabis businesses. For example, many business owners prefer to use the word "cannabis" over "marijuana" to avoid negative connotations. Cannabis refers to the plant that marijuana comes from, but it can also be used as an umbrella term for businesses that handle products from the same plant like hemp, THC, or CBD.
IRS officials recognize that these changes help improve the public's understanding of the industry, which can positively affect legalization efforts.
The SAFE Act will open up banking opportunities for cannabis businesses that have had alternative money handling methods in the past. By giving business owners access to banks, they can have more thorough financial records, keep track of spending and profit margins, and benefit from banking services like loans when needed. Banks also give these business owners consistent control over their finances in a way that leaves little room for error.
Federal legalization of marijuana remains just out of reach, making shipping and distribution across state lines complicated. Plus, each state has its own rules and regulations regarding state taxes and sales taxes.
Small businesses may not have the time or resources to become familiar with state-specific tax rules and may face penalties for breaking the law. There has been little consistency in regulation between states and even counties, but there's hope for change.
The IRS recognizes these logistical and legal issues in addition to the fact that marijuana is still an illegal substance at the federal level. The IRS operates primarily under federal law, so these discrepancies often create problems for businesses and auditors.
To help navigate these issues, the IRS will operate under voluntary compliance to allow business owners the chance to receive education and improve their business model to follow regulations and adhere to the current rules for taxation.
The IRS promotes education by including helpful guides and information on the official site. The goal is to ensure that growers and sellers have the information they need to make informed financial decisions while operating in compliance with IRS regulations.
If you are a cannabis business in need of licenses, permits, or contract litigation, contact Purdy & Bailey, LLP.