The IRS Goes Super Weed Friendly….Wait, What?
Being a new industry is bound to have its perks however, it is also bound to have its drawbacks. In some ways, the cannabis industry is not much of an emerging industry in the US as it has been around for quite a while. Nonetheless, it is still a new industry in so many respects particularly because regulations are decentralized into the hands of the states because the herb is still considered illegal by the federal government. This is the major reason why the latest IRS initiative is bound to excite everyone in the cannabis industry. Read on as we look deeply into the new initiative by the IRS and how it could be the dawn of great things for the cannabis industry.
The plan of the IRS to help cannabis businesses
It is not every day that the cannabis industry gets a helping hand from government parastatals but the new initiative by the IRS is bound to create more breathing room for cannabis business owners. The IRS has made the announcement of its new initiative to help cannabis owners navigate the troubling waters of the US tax code. The major issues that have plagued the relationship of the IRS and cannabis companies in the past have always been on compliance and non-compliance and this new initiative looks set to address that. The expected effect of this is to foster proper filing and payment by all firms in the industry involved in the production, sales, and distribution of cannabis products.
The new initiative is multifaceted and majorly involves series of reforms to help attend to the peculiarities of the cannabis industry. The first in a number of strategic steps in the initiative is to train and properly educate IRS examiners working around the country on an adequate approach to use with the cannabis industry. This is to be facilitated by training and job aids that will be useful to help them in conducting audits and identifying non-compliant business owners. The initiative also includes room for the agency to do more in terms of creating awareness for such businesses on their tax responsibilities to further improve compliance. This will include providing cannabis companies with access to information that will help to further improve compliance with filing and payment requirements. All these measures under the new initiative will be properly metered out to ensure that cannabis businesses have proper tax breaks with respect to the peculiarities of the industry.
Should cannabis businesses be privy to tax breaks?
It might be surprising to many that cannabis firms are considering tax breaks and this will be largely due to the issue of legalization. Though many states have legalized the use of cannabis for medical and recreational purposes, it is still considered illegal federally which makes the discussions on tax breaks somewhat complex. De Lon Harris, an IRS commissioner has addressed this issue with his post on the website of the IRS. He is already known to be very vocal on the relationship of the IRS with cannabis companies and he has spoken at three outreach events with the cannabis industry in the past year.
He alluded to the fact that the scenario surrounding the legality of the cannabis industry creates a complex situation for the IRS. This is because cannabis businesses have special considerations under the law and because they are very cash-intensive, many businesses hardly use banks to make deposits of earnings. This in turn makes it very hard for the IRS to support such business owners as well as promote compliance in terms of tax returns. Nonetheless, the commissioner is certain that the IRS is well-equipped to see all the necessary things put in place to provide the needed coverage for cannabis businesses.
The IRS Code Section 280E states that “all deductions and credits aren’t allowed for an illegal business”. Despite how clear the previous statement may seem, Harris explains that there is a caveat to it that will cover the cannabis industry. This will involve cannabis business owners deducting the cost of their inventory which is the cost of goods sold. However, normal overhead expenses such as wages and salaries, travel expenses, advertising expenses, and so on cannot be deducted. Though this might be a problem for some business owners, it is still a mere stepping stone to further see how the IRS can help new cannabis businesses.
There are still some things that haven’t changed with the new initiative and it is probably best to clearly state them here. The Internal Revenue Code 61 states that all income is taxable which creates coverage for businesses such as the cannabis industry which is considered illegal federally. It is therefore important for all cannabis business owners to know that despite being a cash-intensive business, tax obligations must still be paid. This includes proper filing of income taxes and employment taxes.
Roles of cannabis businesses in the initiative
In order to put themselves in the right frame to be proper beneficiaries of this initiative by the IRS, there are some steps that are important for cannabis businesses to take to ensure compliance. First off is for all cannabis businesses to have proper knowledge of their investors. This is because some persons of shady characters are known to act as investors and use these new businesses as a front to launder money. It is therefore important that these businesses have proper knowledge of all their investors. Next, it is important that these businesses are properly licensed by state and municipal regulatory agencies.
The final set of requirements for cannabis businesses are more detail-oriented compared to the earlier ones. It is important that all businesses file and pay their taxes on time. Though some of these businesses are cash-intensive there are still provisions to ensure that they report such cash transactions properly. The importance of paying attention to details and ensuring to keep good records cannot be overstressed because this forms the bedrock to facilitate this initiative.