Taxes are one of the great constants of the world, and while a business owner shouldn't spend too much time thinking about the former, the latter will be of major importance year-round—not just come April 15th. The cannabis industry in particular sits in a thorny position: some businesses only have cash on hand to pay Uncle Sam, while others may not be able to enjoy the deductions that other industries appreciate. What should you know about filing taxes if you own a marijuana business?
Marijuana remains illegal at the federal level even though individual cities and states have decriminalized and legalized it. However, since it is still considered income, and thus subject to taxation even if it is an illegal controlled substance at the federal level, a dispensary owner will run into trouble quickly if they don't file appropriately. An IRS statement lays out the fact that "contravention" (meaning acting at odds with established law) doesn't mean you can avoid paying taxes.
Section 280E of the Federal Code says that sales of illegal goods are subject to taxation but not tax exemption: not only do dispensary owners have to pay up, but they cannot enjoy the tax breaks or favorable policies that other industries might. Furthermore, an IRS memo suggests that there are business deductions that owners can take, but also says that this is for guidance purposes only, and does not qualify as a precedent for a legal challenge. The end result is that an owner will still need to pay taxes on income or be subject to tax evasion, even if it seems strange that the government demands a cut of something they don't consider legitimate.
If federal taxes are a headache, the good news is that state taxes for a cannabis business tend to be far more straightforward. After all, since states are legalizing cannabis in part to grow their economies, they provide certain tax advantages to cannabis companies to encourage growth and jobs: the state of Colorado provides a helpful webpage about the various taxes and duties that businesses in their industry must address. All states impose a sales tax, while a few (such as Alaska) impose an excise tax; the excise tax usually is levied whenever cannabis is sold from a producer to a distributor. Since each state that has legalized cannabis also requires a license, there is typically a tax for this licensure as well. Tax structures vary strongly from state to state, and what is taxed in California may be different in Oregon; cannabis dispensary owners should be very careful to ensure they obey state tax policies to avoid facing a serious audit.
Since cannabis remains a cash-dominated business, governments expect that dispensary owners will have to pay their taxes in cash as well. Although the IRS has reported difficulties handling all-cash tax receipts, over two in three cannabis businesses have no banking connections, making it impossible for them to pay any other way. Furthermore, many banks are not interested in taking on cannabis clients due to the complications of compliance and regulation. Currently, an owner must quite literally take a bag of cash to an IRS office and watch government accountants tally up each note, scheduling the transfer ahead of time. The IRS stipulates that two employees must be in the counting room at all times to ensure no funny business takes place.
If the prospect of counting out each penny of a huge tax bill gives you a headache, know that a banking solution will be able not just to create a digital payment for the government tab, but to provide further financial relief for a cash-clogged system. CannaBusiness Financing has helped cannabis industry businesses to break through the "cash ceiling" and gain access to the industry banking they require for smooth operations. Through US-based bank partners our team can help you and your business gain access to a more secure means of managing business transactions.
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