Dispensaries, unlike many businesses, can’t take normal deductions on their federal taxes. But there are still ways they can reduce their federal tax liability.
One of the biggest questions facing legalizing states is how to deal with the existing cannabis industry that continues to operate outside state regulations.
Colorado’s approach has been one of generally looking the other way as long as businesses pay state taxes and follow certain record-keeping procedures. Other states have taken steps to bring previously operating dispensaries into the light, often by requiring them to meet onerous security and product testing standards not faced by new entrants to the market.
The question of whether these existing operators will be required to pay federal taxes has received considerable attention since Congress passed 280E, which prohibits taxpayers “trafficking in controlled substances” from taking “normal tax deductions and credits.
But how do dispensaries pay federal taxes when the products they distribute are federally illegal? We explain this and more in the following post.
Do Dispensaries Pay Federal Tax?
Yes, dispensaries do have to pay federal tax. But it doesn’t stop there; dispensaries are responsible for paying special state marijuana sales taxes, state income taxes, and federal income taxes.
However, since marijuana is still prohibited at the federal level, it’s quite challenging for cannabis operations to take deductions. This is because of 280E.
280E is a tax code section that prohibits drug trafficking organizations from taking business deductions. This means dispensaries are forced to report all revenue as taxable income.
But there are some ways around 280E. We cover this in other posts. However, if you have any questions, feel free to contact us to learn more about how we can get you the most deductions possible.
How Do Budtenders Pay Taxes?
All cannabis employees must receive a paycheck. This is comparable to how any other job will pay an employee. The budtender’s gross pay will have state and federal payroll taxes deducted and matched by the employer (the dispensary). From there, the dispensary should pay these funds to the government or other creditors for the budtender.
Can Dispensaries Deposit Money in the Bank?
Unfortunately, dispensaries aren’t always given the same opportunities as every other business. This, of course, includes the services banks and credit unions provide to other operations. Since financial institutions must risk losing their license if they accept cannabis-related operational funds, most of the time, they’re not willing to take the risk.
New Guidance for Dispensaries from IRS
The Internal Revenue Service (IRS) has updated its guidance on cannabis industry tax policy. This includes some instructions regarding how cannabis operations – including dispensaries – that don’t have access to banking and credit union services can pay their taxes in cash.
Since marijuana is still federally illegal, the cannabis space doesn’t get the same tax benefits other markets are given. However, this sector still has an obligation to pay taxes and report transactions properly.
The IRS explained that court rulings have made it clear that businesses must pay taxes even if they sell products illegal under state or federal law. It also elaborates on the idea that marijuana companies may be eligible for payment plans if they cannot fully pay their taxes. Furthermore, it highlights that cannabis businesses may experience the same penalties businesses operating in other spaces can expect during an income audit.
One of the main topics on everyone’s mind is tax benefits. The 280E tax code “disallows all deductions or credits for any amount paid or incurred in carrying on any trade businesses that consist of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.”
“Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income,” said the IRS, further explaining that “taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.”
“Accordingly, a marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471,” the IRS said.
Thus, even though cannabis businesses don’t get the traditional deductions other operations receive, they can calculate the cost of goods and acquire some tax relief. However, as we await a change in the federal legal status of marijuana, the cannabis space continues to operate at a disadvantage.
Concluding on Dispensary Taxes
Despite the fact that dispensaries operate legally in numerous states, the federal government still deems this type of business illegal. However, these operations still have tax obligations.
With this in mind, it’s crucial for cannabis dispensaries to understand these tax obligations and fulfill them to maintain their legal operations. If you have any questions about federal taxes for dispensaries, feel free to contact us at any time. Our team of experts is here to help in any way possible!