Marijuana’s popularity is flourishing. There’s no doubt about it. As more states legalize its medicinal or recreational use, more and more cannabis-related businesses are sprouting up. Consumers are spending more every year. Job openings in the industry continue to increase by triple digits. The industry is projected to pay billions in taxes each year.
But, as a new industry tries to grow, old laws hold it back.
Background of the Industry
As of summer 2018, more than half of the states in the U.S., as well as several territories, have laws that allow medical and/or recreational marijuana sales, but the drug still remains listed as an illegal Schedule 1 controlled substance by the federal government. This creates serious challenges for businesses in the marijuana industry, because they have increased trouble opening bank accounts and obtaining startup loans, among other things.
Does the IRS tax those who work in federally-outlawed industries? Yes, folks who work in the marijuana industry (in states for which it is legal) still have to pay federal taxes, but some of their rules are different from everyone else’s.
Business Deductions Allowed Versus Not Allowed
Since marijuana is illegal under federal law, businesses in the industry are not taxed on their gross receipts, which is a total sum of money that a business received throughout a year. Thanks to a piece of the Internal Revenue Code that was written nearly 40 years ago, people working in the marijuana industry are unable to deduct all of their ordinary and necessary businesses expenses from their taxes.
What is allowed? The deduction of the cost of goods sold (i.e. what a taxpayer pays for their products), as well as costs that are required to prepare the products for sale are permitted. The latter includes rent, utilities and maintenance costs. But it does not include things such as marketing and general business expenses.
Our Recommendations for Businesses in the Marijuana Industry
The malleable future of the marijuana industry is in the government’s hands. But that shouldn’t stop marijuana-related businesses from best positioning their company for success.
- Be on the lookout for further clarification of our country’s newest tax reform, specifically regarding the 20 percent deduction for income from “pass-throughs” (i.e. businesses that don’t pay corporate income tax). This deduction, which is seemingly beneficial for small businesses and independent contractors, lacks guidance and leaves business owners and tax professionals alike confused as to how to calculate it.
- Don’t structure your marijuana-related business as a S corporation. Companies listed as S corporations have to pay salaries, which won’t all be deductible for businesses in the marijuana industry.
Are you a business owner in the marijuana industry with questions regarding taxes or business deductions? Please contact our skilled experts at Paragon Accountants today!
