The IRS is going super weed friendly … wait what?

Being a new industry certainly has its advantages, but also its disadvantages. In a way, the cannabis industry in the US is not an emerging industry as it has been around for quite some time. Still, it’s still a new industry in many ways, especially because the regulations fall decentrally into the hands of the federal states because the herb is still considered illegal by the federal government. This is the main reason the latest IRS initiative is sure to delight everyone in the cannabis industry. Read on as we delve into the IRS’s new initiative and how it could be the start of big things for the cannabis industry.

The IRS’s plan to help cannabis companies

It’s not every day that state parastatal organizations support the cannabis industry, but the new initiative by the IRS will give cannabis business owners more air to breathe. The IRS announced its new initiative to help cannabis owners navigate the troubled waters of US tax law. The main issues that plagued the relationship between the IRS and cannabis companies in the past have always been compliance and non-compliance, and this new initiative is designed to address them. The expected effect is that all companies in the industry involved in the manufacture, sale and distribution of cannabis products encourage proper filing and payment.

The new initiative is multifaceted and essentially comprises a number of reforms to address the specifics of the cannabis industry. The first of several strategic steps in the initiative is to educate and properly train IRS examiners working across the country on an appropriate approach to use in the cannabis industry. This is to be facilitated through training and job aids to help them conduct audits and identify non-compliant business owners. The initiative also provides room for the agency to do more to raise awareness of such companies about their tax obligations in order to further improve compliance. This includes providing cannabis companies with access to information that will help further improve compliance with registration and payment requirements. All of these measures under the new initiative are dosed appropriately to ensure cannabis companies receive adequate tax breaks for the specifics of the industry.

Should cannabis companies be privy to tax breaks?

It may come as a surprise to many that cannabis companies are considering tax breaks, and this will mainly be due to the issue of legalization. Although many states have legalized the use of cannabis for medical and recreational purposes, it is still considered illegal at the federal level, which makes discussions about tax breaks a little complex. De Lon Harris, an IRS commissioner, raised this issue in his post on the IRS website. He is already known to be very vocal about the IRS’s relationship with cannabis companies, and he spoke to the cannabis industry at three outreach events over the past year.

He alluded to the fact that the cannabis industry legality scenario creates a complex situation for the IRS. This is because cannabis companies have legal specifics and because they are very cash intensive, many companies hardly use banks to make deposits. This, in turn, makes it very difficult for the IRS to support such business owners and encourage tax filing compliance. Nonetheless, the Commissioner is confident that the IRS is well equipped to do whatever is necessary to provide the necessary coverage for cannabis companies.

IRS Code Section 280E states that “All deductions and credits are not allowed for any illegal business”. While the previous statement may seem so clear, Harris states that there is a caveat that will cover the cannabis industry. This involves cannabis business owners subtracting the cost of their inventory, which is the cost of the goods being sold. However, normal overheads such as wages and salaries, travel expenses, advertising expenses, etc. cannot be deducted. While this could be a problem for some business owners, it’s just a stepping stone to further see how the IRS can help new cannabis businesses.

There are still some things that haven’t changed with the new initiative and it is probably best to be clear about them here. The Internal Revenue Code 61 states that all income is taxable, which creates coverage for businesses like the cannabis industry, which is considered illegal at the federal level. Therefore, it is important for all cannabis entrepreneurs to know that despite a cash-intensive business, tax obligations still have to be paid. This includes the proper filing of income taxes and payroll taxes.

Roles of cannabis companies in the initiative

To put themselves in perspective to be a proper beneficiary of this IRS initiative, cannabis companies need to take a few steps to ensure compliance. First of all, all cannabis companies need to really know their investors. This is because some shady individuals are known to act as investors and use these new companies as an excuse to launder money. Therefore, it is important that these companies have a thorough understanding of all of their investors. Next, it is important that these companies are properly licensed by state and local regulators.

The final requirements for cannabis companies are more detailed compared to the previous ones. It is important that all businesses file and pay their taxes on time. Although some of these companies are cash intensive, there are still regulations in place to ensure that they properly report such cash transactions. The importance of paying attention to details and keeping good records cannot be overstated as this is the foundation to make this initiative possible.

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