The departure of Representatives Jared Polis and Dana Rohrabacher from Congress left vacant two seats on the bipartisan Congressional Cannabis Caucus (the “Caucus”) so on January 9, 2019, the new leadership team of the Congressional Cannabis Caucus was announced, with Representatives Barbara Lee (D-CA) and David Joyce (R-OH) joining founding members Earl Blumenauer (D-OR) and Don Young (R-AK).
The Caucus was first established in 2017to help shape the marijuana reform agenda in the House and build bipartisan support for legislation that would address issues facing the marijuana industry such as banking, taxation, de-criminalization, medical research and veterans’ healthcare.
The comments of three of the members of the Caucus on the work they hope the Caucus will accomplish, from addressing the racial injustices of the drug war to implementing commonsense policies to support medical research into marijuana were made in various press releases.
Rep. Blumenauer stated:
“The Cannabis Caucus was the first of its kind to create a forum for elected officials to collaborate on ways to address our outdated federal marijuana laws. Congress is clearly out of step with the American people on cannabis when national support for federal marijuana legalization is at an all-time high and we saw several states move toward with legalization last November.”
The addition of Rep. Lee adds diversity to the Caucus’s leadership as she will become the first woman and first African-American to serve as co-chair. Rep. Lee is no stranger to cannabis activism as she introduced the Marijuana Justice Act in the last Congress which received the highest number of co-sponsorships of any legislation that would remove marijuana from the Federal Controlled Substances Act in history.
Rep. Lee stated:
“For far too long, communities of color and women have been left out of the conversation on cannabis. I am committed to ensuring that marijuana reform goes hand-in-hand with criminal justice reform so we can repair some of the harm of the failed War on Drugs. We must also work to build an industry that is equitable and inclusive of the communities most impacted by cannabis prohibition,” said Rep. Lee.
Rep. Young stated:
“Since the initial launch of the Congressional Cannabis Caucus we’ve seen an exponential growth in interest, legislation, and membership many would not have expected.The idea of States’ Rights has been a central tenet of this movement and one that I believe will ultimately carry the day. I encourage all Members to join us in this debate and explore the varying issues.”
It is noteworthy that Rep. Joyce becomes the first leader in the Caucus to come from a state (Ohio) that has yet to pass an adult-use regulatory program. He nevertheless has been a long-time supporter of reform efforts introducing The States Act (legislation that would ease the tension between federal prohibition and state-legal cannabis programs), as well as was a cosponsor of the Ending Federal Marijuana Prohibition Act (legislation which would remove cannabis from the Controlled Substance Act entirely).
The Federal Controlled Substances Act
The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law and other states that have legalized cannabis, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back though has no impact on the IRS which will likely start in 2019 to more aggressively target cannabis businesses with audits.
Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay
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. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.
This risk should be risk posing the greatest challenge to any cannabis business as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.
What Should You Do?
While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering this risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.