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My business is a marijuana dispensary that I operate in compliance with my state’s laws. The federal government considers this an illegal activity. Do I have the same income and employment tax filing obligations as any other business?
Yes. Income from any source is taxable. Internal Revenue Code § 61(a). The Supreme Court has long held that income from illegal sources is taxable and is not exempt from taxation. James v. United States, 366 U.S. 213, 218 (1961). More recently, federal courts have consistently upheld Internal Revenue Service determinations that state compliant marijuana dispensaries have taxable income. E.g., Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015); Feinberg v. Commissioner, 916 F.3d 1330 (10th Cir. 2019); Beck v. Commissioner, T.C. Memo. 2015-149. Similarly, illegal businesses have no exemption from their employment tax obligations.
If I can’t fully pay the amount I owe, are payment plans available that I can afford?
If you can’t pay the amount you owe in full, you may qualify for one of several options available to help taxpayers pay their balance over time or to temporarily delay collection until your financial situation improves. Visit the following links for more information about:
- Payment Plans – To meet your taxpayer obligation in monthly installments by applying for a payment plan. Most taxpayers will qualify to apply for a payment plan online.
- Temporary Delays of Collection – If you cannot pay any of your tax debt, you can request the IRS temporarily delay collection until your financial situation improves.
What penalties or additions to tax could a participant in the marijuana industry be subject to if adjustments are made during an income tax audit?
A participant in the marijuana industry is subject to the same penalties and additions to tax as any other business. A non-exhaustive list of penalties and additions to tax that might apply include: additions to tax under 6651 if a return is filed late or payments are made late; a penalty for failure to make estimated tax payments if sufficient estimated tax payments are not made; accuracy related penalties; and, in cases of fraud, penalties under section 6663. See generally Alternative Health Care Advocates v. Commissioner, 151 T.C. 225 (2018).
Will penalties under section 6662 be proposed if an audit ends with the IRS proposing adjustments for a participant in the marijuana industry?
Penalties will be considered on a case by case basis. The Tax Court has previously upheld a negligence penalty under section 6662 where a participant in the marijuana industry failed to keep adequate books and records. See Olive v. Commissioner, 139 T.C. 19 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015). The Tax Court more recently upheld section 6662 penalties when petitioners did not prove they had reasonable cause for significant omissions of income on their returns. Alternative Health Care Advocates v. Commissioner, 151 T.C. 225 (2018); Richmond Patients Group v. Commissioner, T.C. Memo. 2020-52.
I operate a business that consists of selling marijuana. Can I claim deductions to determine my taxable income?
Internal Revenue Code section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade businesses that consist of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act. This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana, because trafficking marijuana remains illegal under the federal Controlled Substances Act. United States v. Oakland Cannabis Buyers’ Co-op., 532 U.S. 483 (2001). Accordingly, section 280E disallows all deductions or credits for a business that sells or otherwise traffics marijuana. N. California Small Bus. Assistants Inc. v. Commissioner, 153 T.C. 65 (2019).
Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income. The Internal Revenue Service takes the position that section 280E-affected taxpayers must calculate their cost of goods sold pursuant to Internal Revenue Code section 471 and the associated Treasury Regulations. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business. For more detail, see Chief Counsel Advice 201504011 PDF (released 1/23/2015).
Accordingly, a marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471.
What do I need to do for cash payments over $10,000 concerning information returns?
Trades or Business, including marijuana related businesses, must comply with IRC § 6050I and the regulations thereunder. These businesses must report cash receipts greater than $10,000, in a single transaction and/or related transactions.
The business(es) must also:
- Develop policies and procedures reasonably designed to identify and report cash receipts as required.
- Include in their policies and procedures the requirement to obtain and verify certain customer information to ensure the information included on the report is accurate and complete.
- Retain copies of forms filed for a period of five years. Depending on the type of business, other regulatory requirements may exist regarding how long certain documents must be retained.
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Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com
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