Two bills currently being considered by the California State legislature that would authorize legal cannabis businesses to provide free cannabis or cannabis products to a medicinal cannabis patient and would allow temporary licenses to be re-validated if an annual license application has been submitted. These measures if enacted into law could help legal cannabis businesses to thrive and level the playing field with cannabis businesses that continue to operate in the grey and black markets.
The proposed legislation, which is sponsored by state Senator Scott Weiner, was introduced in the current session on December 3, 2018 would allow licensed cannabis businesses to provide free cannabis or cannabis products to a medicinal cannabis patient if specified requirements are met. This is more liberal that existing administrative law which prohibits a retailer licensee from providing free cannabis goods to any person or allowing individuals who are not employed by the retailer to provide free cannabis goods to any person on the licensed premises. The bill also provides relief from the imposition of state taxes on the donated cannabis and cannabis products. The full text of the Bill can be viewed here.
Senate Bill 67
The proposed legislation, which is sponsored by state Senator Mike McGuire, was introduced in the current session on January 8, 2019 would revalidate an expired temporary license if the licensee submitted an application for an annual state license before the licensee’s temporary license expiration date, and would require the extended temporary license to expire on December 31, 2019, unless otherwise revoked. This legislation has serious ramifications for the legal cannabis industry in California as many businesses are operating under temporary licenses and there are delays and other challenges poised at the local level that could result in temporary licenses expiring before final annual licenses are issued. If this legislation is not enacted into law, current temporary license holders will not be able to operate after their temp licenses expire, leaving the state with a major supply crisis and discouraging future investment into legal cannabis. The full text of the Bill can be viewed here.
Even though 33 states have legalized cannabis for medical or adult use, banks and financial institutions are hesitant to provide services to cannabis businesses because federal law still classifies cannabis as an illegal Schedule 1 drug under the Controlled Substances Act.
Higher Federal Taxes Still Remain
While the developments listed above are favorable for California 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.
Federal Reporting Of Cash Payments Still Remain
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.
How Do You Know Which Cannabis Tax Attorney Is Best For You?
Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government. While cannabis is legal in California, that is not enough to protect you. It’s coming down that the biggest risk is TAXES. Be proactive and engage an experienced Cannabis Tax Attorney 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 Palm Springs) and other California locations protect you and maximize your net profits.