If You Can’t Beat Them, Then Join Them

Under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law. Republican congressman, John Boehner, now age 68 who was first elected to the House of Representatives from Southwest Ohio in 1990 and served as Speaker Of The House from 2011 to 2015 said he was “unalterably opposed” to cannabis legalization …. but that was nine years ago.

How things have changed –

• Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. Eight of those states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington) and the District of Columbia have also legalized marijuana for recreational use.

• According to a 2017 Yahoo News/Marist Poll survey, 83% of Americans support legalization of marijuana.

• Congressman John Boehner has joined the advisory board of Acreage Holdings, a company that cultivates, processes and dispenses cannabis in 11 U.S. states.

• President Trump discusses with Republican Senator Cory Gardner how he would consider backing Congressional legislation that would protect states with legalized marijuana from the Department of Justice.

Still Have Higher Taxes …

While the developments listed above are favorable for cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Still Have Reporting Of Cash Payments …

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

What Should You Do?

Given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  Although cannabis is legal in California, that is not enough to protect you. Be proactive and engage an experienced attorney-CPA in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario) and other California locations protect you and maximize your net profits.