Cannabis Companies and Taxes: Advice from the IRS

By Maureen Meehan

The Internal Revenue Service correctly anticipates the continued growth of the cannabis industry and wants its share of the green. Who can blame them? It is what they do.

To that end, the IRS offers some useful suggestions to cannabis companies, incidentally in the contradicting position of paying taxes to a federal government that continues to make cannabis illegal.

Photo by Nikolay Ponomarenko / Getty Images

Still, the IRS is nothing if not persistent. Here’s what the 159-year-old government agency, set up essentially to fund the civil war, has to say about paying their taxes to cannabis companies.

In a blog post, De Lon Harris, an IRS audit commissioner who clearly has a flair for the obvious, described the situation as “evolving and complex” and “difficult from a business perspective.”

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What Harris is apparently referring to is that cannabis companies that have been constantly denied access to banks and financial institutions have to work on a mostly cashless system.

Taxation without representation? Almost.

Despite the fact that many states now have some form of legalized cannabis, its status is below that Controlled Substances Act means marijuana companies cannot deduct normal business expenses. This provision, known as Section 280E, states that companies that sell cannabis – or any other illegal federally controlled substance – cannot deduct costs incurred in making, distributing, and selling this product.

RELATED: Are High Government Marijuana Taxes Really the Cause of the Persistent Black Market?

Section 280E of the IRS Tax Act essentially holds cannabis business owners “excluded from valuable tax credits available to other businesses and should exercise caution in deducting business expenses,” says the Hoban Law Group.

What should I do?

Harris said marijuana companies “can deduct the cost of goods sold, which is essentially the cost of their inventory. The normal overhead costs such as advertising costs, wages and salaries, travel expenses, to name just a few, are not deductible. “

Harris added that he understands that “this nuance can be challenging for some business owners, and I also understand that small businesses are not always resourceful.”

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Online class

Despite this disadvantage, a speaker at an online tax tte-à-tête recently presented by the National Association of Tax Professionals said that legality does not matter from an IRS perspective – all income from any source is taxable.

At that meeting and also on Harris’ blog, the IRS’s new website, which was set up last year to tax state-compliant cannabis dispensaries, was mentioned.

This IRS initiative hopes to make things clear and easy for cannabis companies because we all know how straightforward paying taxes can be!

RELATED: Draft Law to Repeal Marijuana Prohibition Adopts Critical House Committee

“I am very focused on the success of this strategy because it is very important for business owners to understand that under the tax laws of our country, particularly the Internal Revenue Code 61, all income is taxable even if someone is running a business that is deemed illegal applies. “Under federal law,” Harris said. “This is a really groundbreaking achievement for our agency.”

It is also groundbreaking that, with a bit of luck, the recent adoption of the Marihuana, Opportunity, Reinvestment and Exungement (MORE) Act of 2021 will soon Repeal the longstanding federal ban on marijuana, thereby ending the state-federal conflict over cannabis policy.

When – and not when – this happens, cannabis companies will pay their taxes just like the rest of us and will no longer be locked out of the system that was designed to protect them.

This article originally appeared on Benzinga and was republished with permission.