As the tax filing deadline approaches, the Safe Harbor Financial team is delving into the fiscal challenges and structural nuances that cannabis taxation presents for the cannabis industry.
Despite the evolving legality at the state level, cannabis remains classified as a Schedule 1 controlled substance federally. This dichotomy presents unique challenges for cannabis businesses, including cash-intensive operations due to banking restrictions.
The IRS faces challenges in supporting these businesses while promoting tax compliance. The impact of the cannabis industry on state revenues is notable. Approximately $2.8 billion in taxes was collected from the cannabis industry across all states in 2023.
Despite its contribution to state coffers, the cannabis industry faces unique challenges related to the cannabis tax.
Section 280E of the IRS Code prohibits deductions and credits for illegal businesses, posing additional hurdles for cannabis entrepreneurs. The deduction of the cost of goods sold is permitted, offering some relief amidst stringent regulations — however, typical deductions, such as payroll and marketing, are prohibited.
Private estimates suggest that approximately $1.8 billion could have been deductible if cannabis companies were rescheduled in 2022.
As margin compression squeezes the industry, the significance of cannabis tax revenue becomes more pronounced. Expenses are higher, and selling prices are lower.
Recent data from Whitney Economics reveals that total delinquent accounts receivable across the cannabis industry are nearing $3.8 billion. It may lead to halted payments to suppliers and potentially result in consolidation and bankruptcy. The industry could use a break.
The IRS launched the Cannabis/Marijuana Initiative, which aims to enhance voluntary compliance with tax laws and ensure effective management of cannabis compliance and taxation issues.
Strategic activities include providing training for IRS examiners and ensuring consistency in approach. They also involve identifying non-compliant taxpayers, collaborating with stakeholders, and offering accessible information to taxpayers.
Central to this initiative is the understanding that all income, regardless of legality under federal law, is taxable. Thus, businesses operating in the cannabis industry must fulfill their tax obligations, including timely filing and payment of taxes.
The IRS has prioritized engagement with the cannabis industry through speaking events. They aim to foster compliance and understanding of state cannabis taxation rules through outreach programs.
Moreover, resources such as the IRS Marijuana Industry page offer guidance on pertinent topics such as Section 280E, income reporting, and cash payment options.
Additionally, cannabis business owners are urged to understand the risks associated with investors and to ensure proper licensing and tax compliance. Non-filers and cryptocurrency users within the industry are highlighted as enforcement priorities, emphasizing the IRS’s commitment to promoting compliance.
While the IRS remains dedicated to positive outreach within the cannabis industry regarding the taxation of cannabis, the ultimate solution lies in federal reform. In Congress, the focus on federal cannabis reform has evolved from a political curiosity to a significant legislative priority.
With a plethora of bills currently under review, the landscape has become dynamic and multifaceted. These proposed laws span a broad range of topics. They cover everything from federal legalization to industry intricacies like legal safeguards for ancillary businesses, equity considerations, and cannabis rescheduling.
Another way to ease the cannabis tax burden is with the manpower it takes to report and handle cash. That’s where companies like Safe Harbor Financial can help.
We can provide compliant banking, payments, and lending services to ease your cash burden and make reporting easier. Our lending team can provide a lifeline to help you meet payroll, pay your suppliers, expand your business to new areas, and more.
The cannabis industry continues to generate substantial revenue for states. However, the challenges of cannabis taxation and structural injustices pose significant barriers to its growth and sustainability. Policymakers must adapt to industry changes to create fair regulations that foster cannabis business success and benefit states and communities.
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