IRS Official Addresses Marijuana Industry’s Financial Challenges And Congressional Solutions

IRS Official Addresses Marijuana Industry’s Financial Challenges And Congressional Solutions
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The Internal Revenue Service’s (IRS) Taxpayer Advocate is reminding people of the unique financial challenges that state-legal marijuana businesses face under federal prohibition. In a blog post published on Tuesday, the independent agency under IRS explained that cannabis companies are still obligated to pay federal taxes—but they’re barred from deducting most expenses that other industries can claim because the federal government considers marijuana a strictly controlled substance. National Tax Advocate Erin Collins didn’t call for a specific policy change, but she did acknowledge efforts in Congress to enact legalization, or at least protect banks that work with state-legal businesses from being penalized by federal regulators. The purpose of the new post was to “shed some light on the frustrations encountered by a growing segment of the business taxpayer population—the growers, distributors, and retailers of marijuana-related products—and educate them on federal tax law,” the agency said. “There are significant federal tax-related consequences for businesses engaged in the ‘trafficking’ of marijuana, even in states that have legalized (or de-criminalized) the use of it,” the tax advocate wrote, adding that a federal tax provision known as 280E specifically precludes cannabis businesses from claiming most deductions. Cannabis companies are able to make deductions for the cost of goods sold, which can “offset their gross receipts,” but that still means that businesses in the industry “end up paying federal taxes on gross profit rather than net income.” The IRS tax advocate gave a hypothetical example to illustrate what that distinction means: Example. A marijuana retailer has gross revenue of $1,000,000. It spent $750,000 on COGS and incurred another $200,000 in business expenses (which are nondeductible per Section 280E). Assuming a 30 percent effective tax rate, the marijuana retailer has a federal tax burden of $75,000 ($250,000 taxable income x 0.30). Had the business been allowed to deduct the other…

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Source : IRS Official Addresses Marijuana Industry’s Financial Challenges And Congressional Solutions

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