Marijuana Tax Information

Marijuana Tax InformationCOMMON MISCONCEPTIONS:

MISCONCEPTION 1: Marijuana dispensaries are not federally approved, so they are not subject to income taxes.

OUR EXPERT OPINION: Although not federally approved, medical marijuana dispensaries are not eligible for IRS tax exemption. For this reason, they are subject to income tax filing and payment. It is safe to assume that all business income will be subject to taxation, unless stated otherwise.

MISCONCEPTION 2: Marijuana businesses are filled under 501(c) nonprofit tax code.

OUR EXPERT OPINION: Not even close. This is not your standard non-profit business, this is medical marijuana, illegal under federal law.

MISCONCEPTION 3: It’s best not to keep operating records in this industry.

OUR EXPERT OPINION: Generally speaking, if you do not have proof of purchase receipts and payments your expenses can be disallowed, resulting in taxes due. For this reason, keep all your records. Hang on to your purchase receipts, even if you have credit card statements to prove the purchase. Hang on to your receipts especially if you paid by cash. Bookkeeping is the ideal way to keep accurate records in the industry. We can help you each step of the way, from setting up your books to preparing and presenting you with the proper financial statements.

MISCONCEPTION 4: Medical marijuana dispensaries are cash based businesses. How is the IRS going to find out what I made, if I don’t claim my income?

OUR EXPERT OPINION: If you don’t claim your income, but incur traceable transactions, it may raise a “red flag” with the IRS. Traceable transactions include, but are not limited to: purchasing real estate, car, business, paying rent, claiming business deductions and more.

MISCONCEPTION 5: Collecting donations in return for marijuana.

Definition: do·na·tion [doh-ney-shuhn] noun

1.an act or instance of presenting something as a gift, grant, or contribution.
2.a gift, as to a fund; contribution. A donation is a gift given by physical or legal persons, typically for charitable purposes and/or to benefit a cause.

Attorney General Guidelines states: Sales Tax, and Seller’s Permits (page 9): “The State Board of Equalization has determined that medical marijuana transactions are subject to sales tax, regardless of whether the individual or group makes a profit, and those engaging in transactions involving medical marijuana must obtain a Seller’s Permit”.

 

OUR EXPERT OPINION: IF YOU HAVE TO PAY SALES TAX, YOU CANNOT CALL A MARIJUANA TRANSACTION A “DONATION”. IN CALIFORNIA, DONATIONS ARE NOT SUBJECT TO SALES TAX. Also, when was the last time you donated money and got something in return? Is the collective you are a member of accepting donations and announcing that they are paying sales tax? What are they paying taxes on if they are collecting donations?? (If that makes sense, the 2 day seminar will be free to whoever can prove us wrong).

MISCONCEPTION 6: I can claim business expenses like rent, bills and salaries for running my marijuana business.

OUR EXPERT OPINION: No you cannot. You see, under the Tax Code, expenses connected with the illegal sale of drugs are disallowed. Since marijuana is illegal under federal law, you cannot claim expenses:

TAX CODE: § 280E. Expenditures in connection with the illegal sale of drugs.No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

 

Enacted in 1982, the year that President Ronald Reagan declared the “War on Drugs,” Section 280E of the federal tax code bans tax deductions related to “trafficking in controlled substances.” This tax code was put into effect prior to the decriminalization of medical marijuana in California in 1996. Since then 20 other U.S. states and the District of Columbia have legalized or decriminalized medical cannabis, but 280E has remained intact and in direct conflict with a growing number of state laws.

 

COMMON AUDIT “RED FLAGS”:
The IRS makes its audit selections based on various factors. In this section we have listed some of the common factors that can raise a “red flag” on your medical marijuana dispensary. Generally speaking, cashed based businesses, large inventory deductions, large Income to expense ratio, large cash deposits, no cash deposits, large cash payments, unfiled income tax returns, unfiled sales tax returns, under reported income, failure to respond to IRS inquiries, related party transactions, and unclaimed payroll deductions can all raise a “red flag”. If your dispensary is under an audit, give us a call today!

Some of the common methods that can reveal unreported income include large bank transfers, large cash purchases, and income analysis. Income analysis is where the IRS adds up your bank deposits and deducts your nontaxable transactions to see if the net amount matches the income reported in your tax return.