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Not sure that things are changing in the tax and legal worlds? Here’s proof that it is: The Internal Revenue Service (IRS) has released a new marijuana business webpage to help business owners understand and meet their tax responsibilities.
That’s right. Marijuana. Webpage. At IRS.gov.
You can find it here.
The IRS says that it “understands this is a new and growing industry and provided frequently asked questions about record keeping, cash payment options, large cash amounts, and other related topics to help promote voluntary compliance in the industry.”
Income From The Sale Of Marijuana Is Taxable
So, first things first. While still prohibited by federal law (possession can lead to fines and jail time), today, forty-two states and the District of Columbia currently have laws legalizing marijuana for either medical or recreational use. As of this summer, states that allow marijuana for medical use include Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, Washington, and West Virginia – as well as the District of Columbia (some states allow CBD oil use only, including Georgia, Indiana, Iowa, Kentucky, Texas, and Virginia). Eleven states have legalized marijuana for recreational use, including Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington.
But the legality doesn’t even matter from a tax perspective. Income from any source is taxable: that includes income from the sale of marijuana (whether legal or not). On the new webpage, the IRS points out that federal courts have consistently upheld its determinations that state compliant marijuana dispensaries have taxable income. E.g., Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015); Feinberg v. Commissioner, 916 F.3d 1330 (10th Cir. 2019); Beck v. Commissioner, T.C. Memo. 2015-149.
But spoiler alert: the sale of marijuana outside of state compliant marijuana dispensaries is also taxable.
Section 280E
If you follow tax and legal developments in this area, you’re already thinking, “But what about section 280E?”
Section 280E of the Tax Code disallows expenses connected with the illegal sale of drugs. It says: Expenditures in connection with the illegal sale of drugs. No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
It’s the gold standard in drug tax laws. As such, on the new webpage, the IRS reminds “businesses that traffic marijuana in contravention of federal or state law” that they are subject to the limitations of Internal Revenue Code (IRC) Section 280E.
Words like “traffic” and “in contravention of federal or state law” are good reminders that issues surrounding the industry are far from settled.
You can find some history on the evolution of the treatment of marijuana in the tax and legal worlds here.
Marijuana Industry FAQs
Still, the IRS aims to make sense of some of the transition – as well as the law as it stands now(ish) – with their Marijuana Industry FAQs (you can find those here).
In the FAQs, the IRS notes that while section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any business that violate federal drug laws (including those that sell marijuana in states that have legalized the sale of marijuana), section 280E does not prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business. So, no to deductions for advertising but yes to deducting the cost of goods sold.
More Marijuana Resources
And, because many marijuana-industry businesses conduct transactions in cash, the IRS also links to resources on paying your tax in cash, reporting single cash transactions of more than $10,000 in cash and a cash intensive business audit techniques guide.
Truly, the times are a-changing.