If you happen to promote marijuana in any kind, Uncle Sam needs his Rivkin Radler LLP reduce

More states across the country are legalizing the sale of marijuana products for medical and / or recreational purposes, but marijuana is still effectively banned under federal law as an Appendix I controlled substance within the meaning of the Federal Controlled Substances Act of 1970.

There is one important and practical exception to this ban, however: the federal government recognizes marijuana companies for the purposes of federal income tax law, and those companies must pay their share of federal taxes. This is true even if marijuana companies currently have limited bank access, which means that most of them only conduct business transactions in cash.

As marijuana moves further into the mainstream, income and sales forecasts keep rising, and the government seeks additional sources of income, marijuana company taxation becomes a bigger problem for marijuana companies.

The tax code

The Internal Revenue Code imposes a tax on income from legal and illegal sources. Federal courts have consistently upheld the IRS findings that state-compliant marijuana dispensaries have taxable income. (Also, it’s worthless that companies that may be doing business illegally under federal law are not exempt from their state wage tax obligations, i.e. Social Security and Medicare taxes.)

In addition, the Code generally prohibits the deduction of costs incurred in the sale of Annex I substances such as marijuana. However, the Code allows the cost of goods sold to be deducted from gross receipts.

The cost of goods sold to producers includes direct material costs, e.g. B. marijuana seeds or plants; direct labor costs such as planting, cultivating, harvesting and sorting; and indirect costs. The indirect costs can include repair costs, maintenance, utility costs, rent, indirect labor and production inspection wages, indirect materials, tools, and quality control costs.

The IRS has also said that the cost of goods sold for retailers includes the cost of the marijuana purchased, minus trade or other discounts, and shipping or other necessary fees to acquire the marijuana. However, the cost of the goods sold does not include marketing, advertising, sales, distribution, interest or various other costs. If these costs are included as part of the cost of the goods sold, they will not be allowed as an “adjustment” which would increase the company’s taxable income and liabilities.

The IRS has a page on its website that provides general guidance for taxpayers in the marijuana industry.

The IRS website also provides answers to frequently asked questions about the marijuana industry, including an explanation of the payment plans available to marijuana companies that are unable to pay in full the amount they owe. Penalties or additions to which a marijuana industry participant might be subject to if adjustments are made during an income tax audit; and the steps for cash payments over $ 10,000.

An open problem

The 2017 Tax Cut and Jobs Act added a new section to the Code that would apply to tax years after December 31, 2017 for small businesses with gross revenues less than $ 25 million. Under this new provision, marijuana companies may be able to argue that they are entitled to use an accounting method that includes all costs in the cost of goods sold. The impact of the law on marijuana companies is still unclear, and the IRS has not indicated when it intends to issue guidance on the matter.

Look to the future

With more and more states voting in favor of legalization, with revenues undoubtedly in the mind and the federal government focusing on taxation, significant developments in this area are likely to be seen in 2021.