The marijuana industry has grown in the U.S. in recent years, as four states have legalized retail/recreational marijuana, 23 states have legalized medical marijuana programs and several other states have legalized low-THC CBD oil. In all, more than half the states have legalized marijuana in some form. Nevertheless, compliance with the numerous state and federal laws and regulations that affect the industry is burdensome for industry stakeholders, and the conflict between state and federal law further complicates the issue.
Engaging in the legal marijuana trade means selling a product that is still outlawed at the federal level, experiencing difficulty opening a bank account and facing severely limited tax deductions.
To help practitioners navigate this complex legal and regulatory environment, Bloomberg BNA hosted a seminar in Denver, CO on Dec. 1 and 2, focusing on the top tax, legal and accounting issues affecting the industry. Below is a quick summary of just a few topics that were discussed.
Status of Marijuana at the Federal Level
The conflict between federal and state law overshadows the industry, as states may have legalized marijuana but it remains a Schedule I controlled substance at the federal level.
Many bills have been introduced in Congress this year that would tackle marijuana at the federal level. Here are a few (this list is non-exhaustive):
Access (or Lack of) to Banking
The federal/state law conflict has led to other struggles for the industry, particularly the difficulty in obtaining access to the financial marketplace and the banking system. Many businesses operate on a cash-only basis because they are unable to open or keep a bank account.
The Department of Justice (DOJ) and the Financial Crimes Enforcement Network (FinCEN) have provided some guidance to the industry, but many financial institutions are still hesitant to risk the negative repercussions that could happen if they provide services to marijuana clients.
Some financial institutions that have been attempting to provide services to the industry are facing other obstacles. For example, in Colorado, there is a pending lawsuit between The Fourth Corner Credit Union (TFCCU) and the Federal Reserve Bank of Kansas City about the Federal Reserve’s denial of a master account number to TFCCU, even though TFCCU received a charter from the state. Without the account number, the credit union cannot open for business.
I.R.C. §280E prohibits businesses from taking federal tax deductions if the trade or business consists of trafficking in controlled substances, like marijuana. Case law says that deductions are allowed for costs of goods sold, but not other things. This means that marijuana businesses can’t take deductions that would be available if they are any other type of business. Importantly, the lack of deductions means paying more taxes at a higher effective tax rate, eating away at profits for many businesses.
However, some states, including Colorado, allow businesses to account for §280E deductions when calculating their state income tax, even if those deductions are denied at the federal level.
Cash Management, Accounting Issues, and Audit Preparation
Excellent record keeping is essential for businesses in the marijuana industry. This is even more important for those businesses operating on a cash-only basis.
Businesses need to track the movements of their cash carefully and keep a record of every transaction. Cash tracking may involve having multiple cash accounts, each for a different purpose (petty cash, cash reserve, register fund, etc.), and keeping cash journals detailing every transaction.
While this is a cumbersome task, monitoring cash movement is essential in preventing problems down the road, particularly when reconciling accounts and putting together the money to pay employee salaries, bills and other expenses, including taxes.
That’s right—businesses can’t forget to pay their taxes just because they may not have a bank account. The IRS will accept cash payments for payroll and income taxes, but an appointment is required.
But keeping such meticulous records will help a business when or if it is ever audited by a state agency or by the IRS.
These are just a few of the industry issues discussed at the seminar. The complex regulatory nature of the industry, which can vary widely between jurisdictions, as well as ethical considerations for lawyers and accountants counseling industry clients, were also covered.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What other tax, legal or accounting considerations are issues for the marijuana industry?
Visit www.bna.com to find information on other professional learning events discussing tax and legal topics surrounding marijuana legalization.
With a free trial to Premier State Tax Library, practitioners have a single trusted resource that provides all of the tools and information they need to develop and implement the right tax strategies.
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