It’s tax time and small business owners all over America are digging out their receipts for deductions, except marijuana business owners because most deductions aren’t for them.
Some of the top tax deductions for small businesses include advertising, office supplies, utilities, business entertaining and legal fees. But cannabis businesses face an different issue that marijuana tax expert refer to as the 280 (e) problem. This U.S. tax code addresses expenditures in connection with the illegal sale of drugs. Marijuana is still classified as a Schedule 1 controlled substance and so the Internal Revenue Service must treat it as such, no matter what a state law may say. The code says no deduction or credit shall be allowed for any amount paid in carrying on a business in a controlled substance. The only deduction allowed is cost of goods sold and it’s used to reduce the gross profits.
These businesses found that it is critical to make sure the expenses are properly categorized as their tax returns are sure to be scrutinized. Accurate record keeping is critical not only for the marijuana businesses, but also the state governments that want to make sure they are collecting all the taxes owed to them. This isn’t a small amount of money. For example, Colorado collected $43 million in taxes for the fiscal year of 2014-2015 and local governments received over $547,000 from this kitty.
Steve Janjic, CEO of Amercanex was prompted to build his platform because of the gaps he saw in the system. Amercanex is the American Cannabis Exchange and was established as an electronic marketplace for wholesale and retail cannabis transactions. “In an industry where the majority of it is cash-based, the states are finding they are not able to tax them properly. We built this platform because of the taxation issue,” said Janjic. He says it gives the states the ability to watch every transaction. His company approaches the tax issue from the government’s point of view.
MJ Freeway on the hand tackles the issue from the business owners side. Jessica Billingsley Co-founder of MJ Freeway Business Solutions said, “What you find is most cannabis licensed operators are very well informed of what they can and can’t take in 280 (e). The biggest challenge is in making sure they are categorizing as much to Cost Of Good Sold as possible.” The IRS issued a memorandum in January addressing taxpayers that traffic in controlled substances with regards to calculating COGS and while it sheds some light, it continues to be limited. With such huge profits, these business owners want to minimize the tax pain as much as the next businessman.
The tax obligations also change depending on whether you are a medicinal marijuana business or a recreational marijuana business. Recreational or retail marijuana has additional excise taxes. As defined by the Internal Revenue Service excise taxes are taxes paid when purchases are made on a specific good. These businesses also have to make sure they have a tax professional that is not only well-versed in the particulars of 280 (e), but are also willing to work with a cannabis-based business.
CPA’s have to be aware that some state boards of accounting may not renew their licenses if they believe that working with a cannabis business does not satisfy a good moral character requirement. The American Institute of Certified Public Accountants (AICPA) issued a statement saying that “It’s not yet clear how State Boards of Accountancy will apply “good moral character” requirements or impose discipline when it comes to supporting marijuana-related businesses, or if they will take a position at all.” The CPA’s are warned to proceed with caution because the Federal government can criminalize cannabis at any time. The AICPA suggests that CPA’s get legal advice before undertaking work for these clients.
It seems many accountants are willing to take the risk as eleven firms are listed as providing nationwide accounting services for marijuana businesses. Colorado has 17 firms and California has 15 that specialize in cannabis accounting. Amy Poinsett co-founder of MJ Freeway said, “They’re in an extremely difficult position as a cannabis operator. They are well educated and they make sure they have advisement teams that are well aware of 280(e).” Especially when tax rates for these businesses easily dwarf others. If you think you pay a lot in taxes, these businesses can pay upwards of 50-75% more in taxes than a typical small business.
Congress is attempting to help these taxpayers with a measure that would tweak 280 (e) and make an exception for marijuana sales that are compliant with state law. It’s H.R. 2240 and it was introduced by Oregon Congressman Earl Blumenhauer in June of 2013 where it was bumped to the House Committee on Ways and Means and has collected dust ever since. Rep. Blumenhauer and Rep Jared Polis of Colorado also introduced the Marijuana Tax Equity Act of 2013 or H.R.501. This imposes a 50% tax on the sale of marijuana by the producer and an occupational tax on industry workers. It too was referred to the Ways and Means Committee in 2013 and has sat there ever since.
That’s because ultimately the feeling with most politicians is that if marijuana businesses want to play, they must pay. They hear about the piles of cash and cultivators spending millions on facilities. They have a hard time being convinced that the small business owners in the industry deserve to be treated like any other small business. So for 2014, marijuana businesses will have to continue paying these high taxes, while they search for legal loopholes – just like a regular company.
Post Courtesy of Forbes