The IRS recently issued guidelines for marijuana businesses, following a report of the Treasury Inspector General For Tax Administration, which recommended that the IRS place additional audit scrutiny on marijuana industry businesses.
The IRS’s new Marijuana Industry web page includes resources for taxpayers working in the cannabis industry to understand their tax obligations and their options for paying taxes, including paying in cash.
Despite being illegal businesses for federal purposes, marijuana industry businesses must nonetheless pay federal income taxes. Because of the Internal Revenue Code’s Section 280E restriction on such businesses’ ability to take deductions for their business expenses, special importance falls on the calculation of Cost of Goods Sold (“COGS”), as this is the only way to reduce gross income before calculating a marijuana business’s tax liability. The IRS’s new Marijuana Industry FAQ page provides links to information on how COGS must be calculated under Section 47, as well as resources on Section 280E.
The IRS’s new resource page also addresses certain concerns that arise because many cannabis companies are cash-based companies with limited access to banking services. The IRS reminds taxpayers that cash payments of over $10,000 must be reported to the IRS within 15 days of receiving the payment, and that cash-based businesses need to have appropriate controls in place to properly account for cash payments and receipts. The IRS also provides information on how a taxpayer can pay their tax bill to the IRS in cash.
Finally, the IRS provides links to other resources that may be relevant to cannabis industry taxpayers, including information for small businesses and self-employed people, guidance on record keeping, and what to expect if audited by the IRS.
If you have questions about taxes and your cannabis business, please reach out to a member of our Tax team.