IRS Releases Tax Tips and Resources for Cannabis Business Owners

On September 27, 2021, the IRS released an online publication intended to help cannabis business owners navigate their federal income tax obligations. The publication touches on a variety of important issues, and it provides links to additional resources for cannabis-based businesses. Here, Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, covers some of the highlights:

The IRS’ Goal is to “Support” Cannabis Business Owners

In its introductory remarks, the IRS notes that the federal government’s treatment of marijuana as a Schedule 1 controlled substance, “creates unique challenges for the IRS on how to support these new business owners and still promote tax compliance.” This comment is noteworthy for two reasons. First, it confirms the IRS’ position in favor of supporting cannabis-based businesses that are operated legally under state law. Second, it makes clear that the IRS remains intent on enforcing cannabis-based businesses’ federal income tax obligations.

Most Business Expenses Aren’t Deductible

Section 280E of the Internal Revenue Code prohibits taxpayers from claiming deductions and credits related to the operation of illegal businesses. “Illegal” is defined at the federal level, and thus currently encompasses all cannabis-based businesses. As the IRS notes, there is a caveat for cannabis-based businesses’ cost of goods sold, but advertising expenses, payroll and travel expenses are not currently eligible for deductions.

Cannabis-Based Businesses Must Deal with the Challenges of Receiving Income in Cash

For a variety of reasons, cannabis is still largely a cash business. While this presents some challenges for cannabis business owners (particularly when banks are hesitant to do business with them), the IRS makes clear that “you still have to make arrangements to pay your tax obligations.” The IRS has published a separate resource that covers ways to pay federal taxes in cash.

Operating a Cash-Based Business Increases the Risk of an IRS Audit

The IRS advises that, “[c]annabis/marijuana business owners . . . need to understand that all cash-intensive businesses can be, and are, audited.” IRS audits can lead to substantial liability, and cannabis-based businesses must take steps to ensure that both (i) they are complying with their federal tax obligations, and (ii) they will be able to prove compliance in the event of an IRS inquiry.

The Intersection of Cannabis and Cryptocurrency Presents Particular Risks

Finally, the IRS is warning cannabis business owners to be careful when it comes to cryptocurrency. While the IRS states that the use of cryptocurrency is one of its “top enforcement priorities in the cannabis industry,” cryptocurrency is also one of its top enforcement priorities generally. The IRS is taking aggressive measures to promote tax compliance in the cryptocurrency arena, and cannabis business owners must be especially careful to ensure that they are meeting their federal income tax reporting and payment obligations.

Contact Boston Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

If you own a cannabis-based business in Massachusetts, or if you are planning to open a cannabis-based business in Massachusetts, we encourage you to contact us for more information. To schedule an appointment with Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 617-692-2989, email ket@thornlawgroup.com or inquire online today.