Heading into the new year, California cannabis company tax compliance and banking will continue to be challenges. Marijuana retailers, growers, product makers and others in the industry would be wise to work closely with an experienced Los Angeles cannabis business attorney to help them navigate these ongoing difficulties.
Recently, the Internal Revenue Service (IRS) issued tips for cannabis compliance. The federal agency noted that while it’s outside of the agency’s power to resolve many of the unique business predicaments that arise from federal prohibition, it wants to help support cannabis companies in becoming tax compliant. Even though marijuana continues to be classified as a Schedule I narcotic by federal authorities, these businesses are still required to shell out federal taxes.
In September, the agency released tips for tax compliance for cannabis businesses. Among those:
- Know your investors. Thousands of people are fighting to get into the industry, but working with investors may have some tax implications and repercussions for cannabis companies. Unregistered and “silent” financing and ownership arrangements, with investors sometimes being referred to as “beneficial owners,” get the benefits of ownership but avoid having the property title or activity in their name. That creates numerous challenges for the IRS, and it may result in issues for proper tax filing and accurate reporting of gross receipts. Also, cannabis business owners should be wary of nefarious investors who attempt to put their funds into a business like this, but jeopardize the entire operation with allegations of money laundering.
- Make sure you’re licensed. You can’t get federal licensing, but make sure you have proper state and local licensing for your operation.
- Timely file and pay your taxes. Even if your business operates with cash, you’re still responsible to file and pay your taxes on time. IRS code doesn’t parse out which income stems from legal vs. illegal sources. All income must be reported. Note that because you’re dealing with a Schedule I narcotic, you must abide by Section 280E – even if your business is 100 percent state legal. That section doesn’t bar you from reducing gross receipts by properly calculating the cost of goods sold to ascertain gross income, though you may not be able to deduct things like selling or advertising expenses. There aren’t any exemptions from employment tax. It may be beneficial to make quarterly payments. Late payments can result in interest and penalties. Non-filers are a priority enforcement for the IRS. So too are those who use cryptocurrency; it’s imperative to use a reputable exchanger.
- Report cash transactions. Your business may not use traditional banking, but you still need to report all cash transactions. Any company receiving $10,000 or more in cash (which is most California marijuana businesses) need to file Form 8300 within 15 days of receiving that payment. Failure to be diligent about this can cause major headaches for your business.
- Maintain good records. This is mission critical for a cannabis business. Keeping meticulous records – all receipts, canceled checks, any shred of documentation that can support income, deduction, or credit should be kept in some form. Keep these records even for expenses that aren’t legally deductible because it’s going to make it easier to prepare your returns and also answer a question quickly if one arises.
Despite the challenges, the IRS hopes to keep audits to a minimum by promoting voluntary compliance wherever possible, addressing unintentional non-compliance with proactive education. Companies that want to be proactive need to be working with an attorney and a qualified accountant.
Freeing up banks to work with state legal cannabis companies would obviously make working with the IRS (and so much more) a great deal easier. Federal regulators have repeatedly chastised Congress for failing to move forward on marijuana reform. The House of Representatives has five times now passed the Safe and Fair Enforcement (SAFE) Banking Act, but it’s been shot down each time by the Senate. Former U.S. Treasury Secretary Steve Mnuchin repeatedly pushed this issue, saying the existing policy has resulted in substantial problems for the IRS and financial regulators.
Some have gone so far as to call this a public safety issue, given the fact that marijuana businesses that deal almost solely in cash continue to be high-crime targets. Despite this, a recent defense bill that was passed failed to include cannabis banking protections – despite bicameral negotiations.
If you are a marijuana business in Southern California concerned about regulatory and tax compliance, our dedicated marijuana lawyers can help.
The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 714-937-2050.
Additional Resources:
Providing Resources to Help Cannabis Business Owners Successfully Navigate Unique Tax Responsibilities, Sept. 27, 2021, IRS