Are you involved in the cannabis – marijuana industry? Do you want to know how growers avoid IRS penalties?
The IRS is working to help businesses involved in the growing, distribution, and sales of cannabis – marijuana.
Why Is This Important?
Cash-only businesses have unique problems. The IRS understands cannabis – marijuana businesses are a new and complicated area. At the same time, business owners will absolutely be held to the same standard as other cash-intensive businesses.
This includes businesses being subject to IRS tax audits, as well as those held liable for IRS tax penalties due to late filing or late payment.
Currently, 36 states plus the District of Columbia have legalized marijuana for recreational and medicinal use. However, 14 states still ban cannabis use. Still, the IRS expects both licensed and unlicensed marijuana businesses to grow.
The industry is tricky from a business perspective. Even though states are legalizing marijuana and treating its sale as a legal business, marijuana is still considered an illegal “Schedule 1 Controlled Substance” under federal law.
This legalization issue creates unique challenges. Specifically, these businesses are conducted primarily using cash since many can’t use traditional banks for their earnings.
How does a business survive without a bank account?
The IRS Cannabis – Marijuana Initiative
Because of these challenges, the IRS is doing what it can to help these businesses. With its new Cannabis – Marijuana Initiative, their goal is to increase timely tax return filing and tax payment. They also intend to help growers better understand tax law affecting their industry.
You can find important educational tips, guidance, and more information on the IRS Marijuana Industry Page. This covers topics like:
- Deducting business expenses (Under IRC Section 280E)
- Cash income reporting
- Cash payment options
- Reporting large cash receipts
- Estimated tax payments
- Keeping good records
Tax Law Offices has posted frequently asked questions related to all businesses, including those in the cannabis – marijuana industry.
We also provide information on how to avoid trouble with IRS audits of cash businesses.
5 Top Tips from the IRS
1. Know your investors
Be Selective with Silent Investors:
There are thousands of investors trying to get into the industry legally. However, there are some dangers that business owners need to be aware of to ensure their investors don’t do more harm than good.
The designation as an “illegal substance” has led to unregistered and silent financing and ownership arrangements. Individuals associated with these arrangements are referred to as beneficial owners, meaning they enjoy the benefits of ownership, but the title and activity is in another name.
This creates complex issues for the IRS and may contribute to a business’s failure to file a tax return or accurately report income. As we know, these are the issues that lead to IRS tax penalties.
Watch Out for Evil Opportunists:
Cannabis business owners also need to be aware of evil, nefarious investors who will try to put funds into these new businesses that could cause them to lose their entire business. If they invest enough money to where they can claim ownership, the business may become involved in laundering money for drug traffickers.
2. Ensure you are licensed
Be sure that your business is licensed for whatever your location requires. Cannabis businesses are highly regulated by state and municipal regulatory agencies.
3. File and pay your taxes on time
As previously mentioned, even if your business operates with cash, you must still file and pay taxes on time.
Business is business. The Internal Revenue Code does not differentiate between income from legal or “illegal” sources. According to the IRS, it’s all income and MUST be reported on your tax return.
4. Report your cash transactions
Because marijuana is listed as a Schedule 1 drug, many of those businesses operate primarily in cash.
If your cannabis – marijuana business receives more than $10,000 in cash in a single transaction, IRS says you must report it within 15 days of receiving the payment. Business owners must be very mindful of this.
5. Keep good records
All records that support an item of income, deduction, or credit that will appear on your return must be recorded. Be sure to keep records for all expenses, even if you can’t deduct them. Well-organized records make it easier to prepare your return and help provide answers in the event you are subject to an IRS tax audit.
Take advantage of these resources to ensure you understand the tax obligations of the cannabis – marijuana industry. Doing this will help protect you against IRS tax penalties.
If your marijuana – cannabis business is already dealing with the IRS, an experienced tax attorney will be able to help you answer questions and navigate the necessary processes.