At this point, we know that the IRS is back to work. We also know that, after a scathing report by the TIGTA regarding the IRS’ negligence in auditing the super-wealthy, the IRS is here to crack some well-heeled skulls. Well, the TIGTA wasn’t quite done with the mathematically inclined – off-the-rack – suits. It seems that the TIGTA has a big issue with the IRS’ handling of marijuana dispensaries.
Whether you think marijuana is the Devil’s lettuce or God’s most generous gift, it can’t be argued that there’s a lot of money involved surrounding the blameless little herb; in 2017, $4.7 billion was collected in Federal taxes from 29 states (QZ.com). That seems like a nice chunk of Chronic change, so what problem could the TIGTA possibly have?
The TIGTA doesn’t think that the IRS is giving enough guidance to Mary Jane manufacturers. The TIGTA’s biggest complaint is that the IRS isn’t explaining Section 280E of the tax code properly. Section 280E was introduced in the 1980s “as a way to block cartel kingpins from writing off yachts and fancy cars” (Marijuanamoment.net). This section says that businesses are not eligible for most tax deductions if they make their money from a drug that falls under Schedule I, which weed does (Marijuanamoment.net). As an aside, marijuana and heroin are in the same category. Really. Now, 280E makes sense when dealing with kingpins, but state-legal dispensaries, while reporting all of their income, aren’t allowed to deduct rent, wages and the normal expenses that come with a brick and mortar shop (Wecannca.com). Since the indica industry can’t deduct, this means that their tax rate is somewhere near 70 percent (Marijuanamoment.net).
The fact that sativa stores can’t use banks also has the TIGTA demanding assistance from the IRS. Since marijuana is still considered naughty under Federal law, “banks risk charges of aiding and abetting a federal crime or money laundering” (Publicfindlaw.com) if they decide to work with dispensaries. Because of this, it’s almost a completely cash industry. Incidentally, since these businesses have to pay taxes in cash, the IRS has had to build “cash rooms” to hold these payments (Marijuanamoment.com). While the IRS demands total transparency from dispensaries, a lot of mistakes can happen when dealing strictly with cash. At this point, the IRS is offering no education regarding how to keep things legal in a folding money world.
When the TIGTA recommended that the IRS work with the Small Business commissioner to “develop…specific guidance…for taxpayers that report Schedule I related activities” (Marijuanamoment.net), the IRS said, “Nah, we’re not gonna do that.” The IRS disagreed with the suggestion and said it had other priorities that needed to be addressed before “developing that specific guidance” (Marijuanamoment.net). I don’t blame the TIGTA for getting a bit snarky. Every agency wants every business to follow the law, but that’s sort of hard for taxpayers when they don’t know what’s required.
Quasi-legal weed is still in its infancy and there are bound to be some problems. Section 280E should be abolished to allow dispensaries to act as any other corporations. Barring that, the IRS owes it to these very lucrative cash cows to at least provide the rule book.
Bourke Accounting bookkeepers and tax preparers know all about small business and self-employment. While weed isn’t legal in KY yet, just like with all new changes, your Bourke Accounting pros already know the rules to keep you in compliance. Whether it’s new standard deductions or reefer returns, your Bourke Accounting specialists never stop learning for you.
Written by Sue H.