Filing taxes

What Marijuana Companies Should Know About Filing Taxes

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Written by Claudia Gantt
Author Claudia Gantt on December 8, 2022

Fact checked by Clinton F Wassor

All of the information on this page has been reviewed and certified by a tax professional.

As of 2020, there are 243,700 legal full-time jobs available at marijuana companies. Sales projections for 2022 of legal marijuana are $22 billion. The cannabis market is projected to be worth $73.6 billion by 2027.

When running a lucrative business, questions often arise regarding write-offs. Business owners in the cannabis industry need to make sure they remain in compliance with marijuana tax laws regarding deductions.

Marijuana companies are especially vulnerable to mistakes when processing tax returns. The laws regarding federal taxation of a business for a federally illegal substance combined with levels of taxation among states leads to confusion and errors.

To run a lucrative business, you need to understand taxes on cannabis and how to file taxes to avoid tax debt. Even an honest mistake impacts your business revenue. Late payments incur a 5% monthly interest charge that increases over time to 25%.

A Catch 22 Operation

When you are operating a marijuana business, your situation is unique. There are 36 states plus the District of Columbia where marijuana is legal for medicinal use, recreational use, or both. As the number of marijuana companies increases, tax laws develop and change.

The business is a catch 22 operation because you are producing and selling a product that is federally illegal. Despite being illegal, the federal government insists you file yearly tax returns and pay taxes on that business. At the same time, you are denied many tax benefits businesses in other industries are able to take.

The complexities of the tax code are difficult enough without the additional regulations for the cannabis industry. The good news is that just like other businesses you can go onto a payment plan if you cannot pay your taxes in full. The bad news is you are subject to the same penalties as other businesses if errors are found during an income audit.

IRS Code 280E

IRS Code 280E prohibits marijuana companies from taking deductions or credits for expenses incurred conducting business that involves the trafficking of Schedule I or Schedule II controlled substances. Marijuana is a Schedule 1 substance.

The code does allow a business to reduce its gross receipts by the cost of goods sold for determining the gross income of the business. This means you can take deductions for the cost of obtaining and producing marijuana.

Not allowable are standard deductions for overhead. This includes wages and salaries of employees, advertising expenses, and business travel. The IRS is working to make it easier to understand the laws specific to this industry, which includes:

  • Coordination and consistency in IRS approach to the marijuana/cannabis industry
  • Training IRS examiners to ensure quality audits and examinations
  • Find ways to identify non-compliant taxpayers
  • Increase awareness of tax responsibilities to increase compliance
  • Provide access to information on how properly filing taxes

These IRS strategies are important to you as a business owner. The IRS Code 61 mandates all income as taxable, even if obtained through the operation of a federally illegal business.

By visiting the IRS marijuana industry page you can obtain information on IRC § 280E plus:

  • Record keeping
  • Estimated payments
  • Reporting large cash receipts
  • Options for cash payments
  • Income reporting

Because cash business owners are frequently audited, it is important to be familiar with how to legally handle a cash business.

Keep Good Records

When running a marijuana business you need to be diligent in keeping all records. This includes receipts, canceled checks, and any other documents that support income, deductions, or credit.

Keep records for expenses that are not legally deductible on your federal tax return. They may help you in preparing the return or answering questions during an audit.

Report Cash Transactions

Even though you are operating a business that is not legal under the federal government, you still have an obligation to report any cash transaction that exceeds $10,000. This must be done on a Report of Cash Payments Over $10,000 Received in a Trade or Business, Form 8300. Cash includes payments made by cashier’s check, money orders, traveler’s checks, or bank drafts.

Failure to comply with this law leaves your business subject to both criminal and civil penalties. The civil penalty for neglecting to timely file Form 8300 during the 2021 calendar year begins with a $280 fine per return, not to exceed $3,392,000 per calendar year pursuant to IRC § 5721(a)(1).

Criminal penalties for willfully failing to file may incur felony sanctions pursuant to IRC § 7203. This includes fines of up to $25,000 ($100,000 for corporations) and/or imprisonment of up to five years. Sanctions for filing a fraudulent form carry fines of up to $100,000 ($500,000 for corporations) and imprisonment of up to three years pursuant to IRC §7206(1).

File and Pay Taxes on Time

The IRS conducts audits on businesses that trigger red flags that reporting is not accurate. You do not want to do anything that draws attention to your business. This means you need to make sure you file and pay your taxes on time. Make sure you only take the business deductions you are entitled to when operating a cannabis business.

Cannabis business owners do not have exemptions for employment tax obligations. As with many small businesses, you may need to make quarterly tax payments. By making these payments on schedule you avoid interest and penalties.

The IRS is aware that there are transporters, wholesalers, growers, retailers, and dispensaries who are not filing U.S. tax returns. These businesses are on the IRS enforcement priority list.

The IRS is also aware of cannabis industry owners using cryptocurrency. The IRS considers cryptocurrency property and gains made in its use are taxable. If using cryptocurrency in your business make sure you are working with a reputable exchanger.

Marijuana Companies Filing Taxes

Marijuana companies need to perform their due diligence when filing taxes. You must comply with all regulations at both the federal and state level. Tax Relief Professional believes that business owners need access to free information to make educated decisions about their business tax requirements.

We can help you find the information you need and direct you to reputable tax professionals to assist you with filing your taxes. Contact us today using our online form or call us at (877) 469-1651.

About the author

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Claudia Gantt

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