Marijuana business tax questionsThis past Friday marked the opening of Maine’s recreational marijuana market, which allows licensed retailers in the state to legally sell cannabis and cannabis products.

While marijuana businesses in Maine may be in compliance with state laws, the federal government considers them to be engaging in an illegal activity. This can create some unique tax challenges. Fortunately, the IRS has released answers to some of the frequently asked questions about this topic.

Question: I operate a legal and state-licensed marijuana business. However, the federal government considers this an illegal activity. Do I have the same income and employment tax filing obligations as other businesses?

Yes. Any income is taxable, regardless of the source. Federal courts have consistently upheld IRS determinations that compliant marijuana businesses have taxable income. Additionally, marijuana businesses have no exemption from employment tax obligations.

Question: What penalties or additions to tax could a marijuana business be subject to if adjustments are made during an income tax audit?

The same penalties and additions to tax as any other business, including late filing and/or late payment penalties under the tax code, negligence and accuracy-related penalties and fraud penalties.

Question: Will the IRS propose penalties under the tax code for a marijuana business if an audit ends with the IRS adjusting the tax return of the business?

Penalties are considered on a case by case basis. The U.S. Tax Court has approved negligence penalties under the tax code when a marijuana business failed to keep adequate books and records. It has also issued accuracy-related penalties when the business failed to show reasonable cause for significant omissions of income from their returns.

Question: Can I claim deductions for my marijuana business to determine my taxable income?

The tax code prohibits all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of selling marijuana (even if it’s operating within state laws). The reason is because marijuana remains illegal under the federal Controlled Substances Act.

However, the tax code doesn’t prohibit a marijuana business from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing the marijuana that they sell, and those costs will depend on the nature of the business.

Accordingly, a marijuana business may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold.

Question: What information returns does a marijuana business need to file when a customer makes a cash payment more than $10,000?

Just like other businesses, marijuana businesses must report cash receipts from a single transaction (or related transactions) greater than $10,000 by filing a Form 8300, Report of Cash Payments Over $10,000 in a Trade or Business. In addition, marijuana businesses must develop policies and procedures that:

  • Identify and report cash receipts as required.
  • Obtain and verify certain customer information to ensure the information included on the report is accurate and complete.
  • Retain copies of forms filed for five years. Depending on the type of business, other regulatory requirements may exist regarding how long certain documents must be retained.

The IRS website has more answers to frequently asked questions regarding taxes for marijuana business. You can read them here.