Accounting and Tax Rules for a Marijuana Business: 7 Tips from an NYC CPA

Everything You Need to Know About Uncle Sam and Mary Jane…Tax Rules for a Marijuana Business

States across America are legalizing marijuana at a rapid rate. As of March 2019, recreational use of cannabis is legal in 10 states plus Washington D.C. As for medical marijuana? That’s legal in 33 states (plus D.C.). More states are expected to follow suit throughout the year.

But there’s one big problem – at least when it comes to tax rules for a marijuana business (also known as a marijuana-related business or MRB). According to the Federal government, “the use, sale, and possession of cannabis with over .3% THC is illegal under federal law.”

It is important to note that in general, CBD products – such as oils and edibles – with THC levels under .3% are deemed LEGAL by the federal government. However, some states, counties, and municipalities place restrictions on these products so consult with the rules in your area. This article is instead is focused on tax rules for a marijuana business that is reselling or producing products with more than .3% THC.

So, what do you do if you operate a marijuana business (or are considering starting one) in a state where pot is legal yet the Feds still consider it an illegal, Schedule I drug? You first contact a CPA well-versed in tax rules for a marijuana business.

Tax rules for a marijuana business are harsh on the federal level – and complicated on the state and local level. This isn’t something you want to tackle on your own. However, at least get started by familiarizing yourself with these 7 issues….


1) Many of Your Deductions Will Go Up in Smoke (Thanks to IRS Code Section 280E)

It’s important to repeat this again: According to the U.S. Federal government, marijuana and cannabis products with over .3% THC are illegal. They’re a Schedule 1 / Level 1 drug listed right alongside peyote and heroin.

In most cases, the Feds aren’t going around shutting businesses in states where pot is legal. However, every marijuana business is subject to the IRS’s tax rules for Schedule 1 / Level 1 drugs, most notably Section 280E.

Section 280E of the IRS Tax Code explicitly prohibits marijuana businesses from taking deductions for regular business expenses (except for the “cost of goods sold” or COGS…more on that in the next section).

Regular business expenses include everything from employee salaries to marketing, telephone and Internet bills to rent. Say goodbye to those deductions, you simply cannot take them.

In some instances, tax rules for a marijuana business may allow you to deduct state or local taxes. Before you make any decisions related to your business, always check with professionals well-versed in the cannabis industry, including a risk management professional, lawyer and accountant.

For any history buffs out there, this is a President Reagan-era tax rule. It came from a federal case involve a cocaine drug dealer who said he had the right to deduct his “ordinary business expenses” incurred from running his “business.”


2) A Marijuana Business Can Deduct COGs

There is a glimmer of hope in the IRS tax rules for a marijuana business. You are allowed to deduct your COGs. Let’s say you intend to open a marijuana dispensary (in a state where it is legal, of course). You can deduct the direct costs of what you pay for marijuana or other THC-containing products. That includes shipping costs, too.


3) Keep Close Watch on Your Inventory

From restaurants to clothing stores, every business needs to keep a watchful eye on their inventory. This is doubly important in the marijuana business. Theft by employees, customers, and others is a constant threat. Not to mention, you’ll likely have a lot of cash on hand. You must use an accounting and tracking system that accounts for every item in stock. There are also complicated tax rules for a marijuana business – specifically surrounding how you track inventory. Discuss this with a qualified CPA right away.


4) Meticulous Bookkeeping is a Must

Every business owner dreads an audit, but if you plan to open or currently operate a marijuana business – act as if the IRS auditor is coming next week! Marijuana businesses are heavily audited because they are a cash-heavy operation. Now, if you’re following the tax rules for a marijuana business at all levels (Federal, State, Local) – and keeping accurate records – you can breathe a little easier. Still, if you are audited, the IRS will be going deep into your books. Ensure you track every single purchase, sale, and any other transaction…down to the cent.


5) Focus on Form 8300

One area of a marijuana business that the IRS is especially focused on is Form 8300. This is the form you must fill out if you make any cash deposits of $10,000 or more. Experts have noted that the IRS is watching to ensure marijuana businesses are filing this form on a timely and accurate basis.


6) It Can Be Difficult to Find a Bank to Work With…

…even if you adhere to the tax rules for a marijuana business. Again, that magic number of $10,000 comes into play. Due to FINRA regulations, banks must also report when a business deposits over $10,000. And since the marijuana business is still considered illegal by the Federal government, and banks are federally regulated, most banks will not allow you to open an account. The 2019 Secure and Fair Enforcement Banking Act or SAFE Banking ACT bill aims to change that, but as of now, you must either run a cash-only business or seek out one of just 375 banks and 111 credit unions that will work with a marijuana business. Your CPA should be able to recommend a few for you.


7) You May Want to Consider Opening 2 Separate Businesses

Perhaps you already run a retail business, and want to add marijuana edibles to your product line? Beware. As soon as you do that, you are considered by the IRS to be subject to tax rules for a marijuana business. As mentioned earlier, you will not be able to take any deductions for ordinary business expenses! Any non-marijuana items sold alongside marijuana are considered “ancillary to the sale of cannabis.” That’s why some businesses are setting up separate stores and entities: one for marijuana products, and one for all other products. This is a complicated process and you must speak with both a lawyer and CPA before doing so to ensure you are in line with all tax rules for a marijuana business.

Ultimately, there are many marijuana businesses not just surviving – but thriving – amidst these rules and regulations. And yes, there are many lawyers and CPAs ready and willing to help cannabis-based businesses succeed.

Here at Robert P. Russo CPA, we consult with marijuana-based businesses nationwide, and we can help you get the information you need to earn your green – and follow all necessary IRS rules along the way.