The IRS recently updated their website to include a “Marijuana Industry” page. Opening with the sentence, “A key component in promoting the highest degree of voluntary compliance on the part of taxpayers is helping them understand and meet their tax responsibilities while also enforcing the law with integrity and fairness to all,” the page offers brief “general guidance” and links to resources on topics including Internal Revenue Code (IRC) Section 280E, income reporting, cash payment options, and record-keeping.
The page also links to an IRS “Marijuana Industry Frequently Asked Questions” (FAQ), which contains answers to such questions as:
- “I operate a business that consists of selling marijuana. Can I claim deductions to determine my taxable income?”
- “What do I need to do for cash payments over $10,000 concerning information returns?”
- “If I can't fully pay the amount I owe, are payment plans available that I can afford?”
What does CohnReznick think?
While we are glad to see that the IRS is now acknowledging the industry, especially as many states have deemed marijuana businesses “essential” amid COVID-19 shutdowns, our overall impression is that we should temper our excitement. Most of what can be found on the “Marijuana Industry” page was already commonly known and is in line with what we have been advising clients for some time.
We do give the IRS credit for aggregating several useful links in one place for quick reference. The quick references on how to pay taxes in cash, how to facilitate large cash payments, and reporting cash payments over $10,000 will all come in handy.
There has been much discussion about the potential use of IRC Section 471(c) as a way to reduce taxable income in marijuana operations. Several commentators have suggested that the reference to 471 in FAQ further supports this position. However, closer reading of the text suggests just the opposite. The text specifically references 471, not 471(c). The IRS has long held the position that costs of goods sold (COGS) calculated under 471 are legitimate COGS for marijuana businesses, as opposed to cost allocations under Section 263A. This is not new. The FAQ goes one step further and affirms that several common general and administrative expenses are non-deductible, “for example, advertising or selling expenses.”
The “Marijuana Industry” page can be found under the “Small Business and Self-Employed” section of the IRS website. This connects with their historical approach to auditing cash businesses and start-up businesses, and is in line with their audit approach to the industry. We hope to see this new page and its placement evolve as the industry continues to evolve.
Subject matter expertise
Michael D. Harlow
CPA, Partner, Managing Partner – Cannabis Industry
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