*DISCLAIMER: We are not public accountants and are only providing our opinion as it relates to the tax code. We strongly recommend you conduct your own research and always seek the advice of a certified public accountant (CPA) to file your personal or business taxes.
The cannabis industry’s allure lies at the end of its prohibition, but it’s important to remember that the prohibition has not yet been federally ended. This means that those operating in the space, especially those that “touch the plant”, face several unique business obstacles including opening a bank account, handling payroll, and taking out loans. Perhaps the biggest hurdles of all, though, are managing cash and filing taxes.
While accepting and paying in cash is legal, the issue for those in the cannabis industry often lies in the value of the product that’s being traded in cash. Cannabis is currently the highest value ‘agricultural commodity’ with prices hovering around $1500 / lbs. for high THC biomass and around $250 / lbs. for high CBD biomass. This elevated price tag equates to companies keeping hundreds of thousands of dollars in hard cash on hand in order to facilitate transactions. Unsurprisingly, this poses a significant security risk which results in higher operating costs to conduct normal business. The additional capital is deployed in the form of installing and maintaining numerous cameras to record every inch of the facility, fencing in the entire property, staffing professional security services, installing radio frequency identification device (RFID) door locks, employing resources to track people that enter the facility, and implementing state required track and trace software programs.
The other burden that wholesale businesses face with these cash-only sales is that, oftentimes, these businesses exceed the $10,000 IRS threshold for cash transactions. Above this threshold, the parties involved are required to use Form 8300 to report the transaction to the U.S. Treasury. It’s important to note that Form 8300 data is maintained by the Financial Crimes Enforcement Network (FinCEN), a branch of the U.S. Treasury.
There’s a list of DOs and DON’Ts when filing Form 8300, and we encourage anyone interested to read up on the tax code prior to calling their lawyers and accounts. Here are a few good places to get started:
- Tax Code, Regulations and Official Guidance
- 26 CFR Chapter I – Internal Revenue Service, Department of Treasury
- Regulating Marijuana: Taxes, Banking and Federal Laws
The amount of cash and the paperwork involved with it can burden many startup companies in the space, and we’ve personally witnessed the myriad of problems that can arise in these situations, from not being able to handle payroll to having personal accounts frozen.
In regard to opening a bank account, the best advice that we can provide is to meet with a highly skilled accounting firm and tax attorney prior to initiating conversations with banks. For payroll purposes, there are highly trusted operations companies like the Caputo Group that can help manage the licensed cannabis businesses’ cash so that payroll is handled like any other business. This work around also allows employees to receive sought-after benefits like workman’s compensation and insurance.
While on the topic of taxes, it’s important to understand their role in the cannabinoid industry and why they always tend to be intertwined into the topic of cash. This is mainly because cash businesses and transactions always carry with them the stigma of underreporting company revenue. The main issue, however, when it comes to cannabis and taxes is how to navigate ‘IRS Code Section 280E’. In short, Section 280E of the IRS Code states that businesses cannot write off normal expenses if the business engages in trafficking-controlled substances prohibited by federal law, i.e., cannabis and THC products.
To work against this, cultivators and producers often apply what is known as the “full absorption cost method of inventory costing”. We’ll leave the details for you and your accountant to cover, but this method utilizes the cost of goods sold (COGS) and other inventory management strategies to mitigate the burden that Section 280E applies to these businesses. For retailers and distributors, the most common strategy we’ve seen employed is the use of cost basis purchases. The end goal is the same as the full absorption cost method: to mitigate the burden that Section 280E places on startup companies.
Excitement around federal cannabis legalization in the US has never been higher, but until this happens, there will still be a minefield of paperwork and red tape that you need to wade through if you’re looking to enter the cannabis industry as a business owner. Though people’s enthusiasm is a good omen for the future success of the industry, this unbridled eagerness, combined with the space’s current lack of stability, has manifested itself as a ‘cannabis tax.’ This ‘cannabis tax’ equates to paying higher prices for standard services such as banking, accounting, payroll, and taxes.
It’s clear that the lack of standard regulations in the industry from state to state adds to the challenges of operating a cannabis business, but we’re confident that educating the companies’ leadership team on how to handle these cash-driven obstacles prior to starting will increase cannabis businesses’ chance of success.