At the State level, the fight to legalize Marijuana is basically over. Now with 10 states making it legal for adults to consume marijuana without a medical need, and allowing the buying of marijuana in designated centers, the rest of the United States is sure to follow.
What was once an uphill battle has turned into an insanely profitable business venture both for private investors and for the states that have legalized it. For example, it is estimated that Colorado generated more than $1.5 billion dollars in 2017.
With Donald Trump shining a light on the more than 8,700 opportunity zones that exist in the United States, marijuana might just be the key instrument in turning these communities into a prosperous and safe environment for everybody.
I don’t believe there is anything negative that can be said about the introduction of legal marijuana into these states. Crime has gone substantially down, taxes generated from marijuana have created helpful government programs, and even the detractors of marijuana have agreed that it is not harming the community in the way they thought.
Elections are coming soon and I expect at least 5 more states to legalize marijuana in 2020. Before you know it the whole country will legalize marijuana. The is a different kind of battle, as convincing the federal government to do something is much different than it is to convince a state.
Even though there are talks, the path to promote the legalization of marijuana in a federal level have stalled. For this reason, because marijuana is legal in certain states only, dispensaries can only accept cash and not credit or debit.
Because credit is not accepted in marijuana dispensaries the cash that you present to the IRS needs to be done like it was done in the old days. Making it hard for marijuana businesses to deduct expenses on their tax returns like another business can.
United States Code Section 280E states that “a business engaging in the trafficking of a Schedule I or II controlled substance, for example, cannabis, is barred from taking tax deductions or credits.”
In another word, businesses selling or associated with the sale of marijuana-related products cannot benefit from the same tax deduction that other businesses can. They cannot use business expenses to reduce their taxable income.
Take a minute to think about that. Marijuana businesses can’t deduct their cost of goods, rent, and other expenses from gross sales when calculating their taxes. Click here for a Nov 28, 2018 ruling by the US Tax Court on this issue.
Understanding the relationship between federal and state laws can be confusing at times. There is a federal law preventing marijuana businesses from thriving in this economy, yet state laws promote the sale of this product.
If you own a marijuana business you should pay close attention to what the United States Code Section 280E states. To put it in lamest terms 280E is the kryptonite to your Superman, this what it states in its entirety:
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.
The above law is making marijuana businesses pay up to 70% in taxes. A ridiculous amount – even more ridiculous is the fact that despite all of these roadblocks these businesses still generate a decent profit.
There is only one way that a marijuana dispensary can generate a profit and that is deducting the cost of goods sold. Still, that amount depends wildly on what you do in your marijuana business.
We are now entering into a newly coined term that I thought I would never have heard, marijuana accounting. Your marijuana accountant can deduct some taxes based on some of your business activities.
The way to deduct taxes using the Cost of Goods Sold method is pretty straightforward, accounting wise. This would include the cost of the seed, the money, and labor spent on cultivating it, rent, supplies, salaries, etc.
Marijuana is a thriving business in the United States and I expect there to be more states in the upcoming year to join the bandwagon. Send us a message if you wish to open your own marijuana business or want to deduct some taxes from your already existing one.
I hope you’ve found this article on Marijuana and taxes to be helpful. For more information, or for assistance in investing in businesses, please contact us HERE
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