The House of Representatives recently postponed a vote on legislation that would legalize marijuana usage at the federal level and expunge some marijuana-related criminal records. Regulating the sale of marijuana would be left up to the states.
In 11 states, the recreational use of marijuana is legal, while 33 state allow the drug’s use for medicinal purposes.
Without federal legalization, the marijuana industry continues to face unique challenges.
Operating without a bank account
Most financial institutions deny banking services to cannabis-related businesses. Dispensaries operate legally within states, but federal law still classifies marijuana businesses as illegal. In doing business with a marijuana-related enterprise, banks could be charged with aiding and abetting in a federal crime or money laundering.
Access to a bank account is crucial to running a business. Without a bank account, a business cannot complete basic functions:
· No check writing privileges
· Automatic payments or direct deposit are virtual impossible
· Credit cards can’t be accepted
· Few loan opportunities
A few small credit unions and a handful of online boutique banks have checking accounts for marijuana businesses, but the accounts usually charge steep bank fees to offset the risk of keeping the account on the books.
Lots of cash on hand
Marijuana businesses operate almost entirely in cash, which presents a variety of issues. Where do you keep it all? Who has access to it? How do you keep track of it? Businesses must also protect the cash with safes, on-site security, and even armored vehicles.
What do income and employment reporting look like?
Businesses in the marijuana industry have the same reporting requirements as other businesses. Dispensaries still have to report employee wages, withhold taxes, remit those taxes to the IRS, follow state guidelines, etc. Given the lack of a bank account and check writing abilities, many of these businesses have to travel to in-person IRS offices that accept cash.
Marijuana-related businesses that receive more than $10,000 in cash in a single transaction or in related transactions must file Form 8300 within 15 days of the transaction.
What about taxes?
Marijuana dispensaries have the same tax obligations as other businesses. The Supreme Court has long upheld James v. United States, 366 U.S. 213, 218 (1961) that income derived from illegal activity is still subject to taxation.
But you can claim deductions, right? Nope.
Internal Revenue Code section 280E disallows all deductions and credits for businesses that sell or traffic illegal substances. Accordingly, a marijuana dispensary cannot deduct the cost of advertising or selling or other related expenses.
Section 280E does allow participants in the marijuana industry to reduce gross receipts by the cost of goods sold to determine gross income. Therefore, the cost of acquiring or producing the marijuana sold can be used to reduce gross receipts.
Despite the ever-growing popularity of the cannabis industry, maybe hurdles continue to exist for dispensaries and other marijuana-related businesses.