As the medical merits of marijuana have moved into the forefront of the health industry, more and more people are obtaining prescriptions for its use accompanied by a medical cannabis card. From pain to inflammation relief, to appetite stimulation, epilepsy treatment, and killing certain cancer cells, marijuana is being hailed as a miracle drug by many. Seen as the U.S.’ fastest growing industry, many are wondering how the IRS and tax law will regulate it, and our San Jose tax attorneys have been watching the stories as they develop.
Business Owners and Banking
While anyone with their eye on current events is aware of the rising medical marijuana industry, many people don’t quite understand how basic principles like banking and taxes will apply. It is interesting that an industry as large and growing as the marijuana industry still endures growing pains when it comes to the basics of banking and paying taxes. As marijuana is still, officially, declared illegal by the federal government, it is illegal for banks to provide basic services to businesses whose profits come from state-legal marijuana. Thus marijuana business owners have difficulty even getting bank accounts or have had their accounts closed by the banks. The result is that marijuana business owners who wish to pay their taxes, must do so in cash.
According to ‘New Frontier Data’, it is projected that this year, the U.S. alone will see marijuana business owners owing close to $3 million in taxes. While the federal government still designates the marijuana industry as an illicit one, its business owners are obligated to pay taxes under a provisional tax code: 280E. This provision demands that drug dealers and business owners alike making money off illegal substances are obligated to pay taxes on their earnings just like Joe Public.
According to the federal government and the IRS, income made is income reported and taxes paid. New Frontier Data predicts that if marijuana is officially legalized throughout the U.S., Feds will increase marijuana taxes upwards of $18 billion by 2025. While this prediction does not take into account the fluctuating business tax rates, the message is clear: there will be major tax revenue generated by the marijuana industry, and the federal government is certain to get their chunk of the pie.
Safe Banking and Protection for Business Owners
Moving into 2018, legislation amendments regarding the legitimization of marijuana are predicted to be under way in Congress. A 2017 Oregon bill, the SAFE Banking Act, is a perfect example of these legislative changes as it acknowledged the need and allowed for financial institutions to provide services to marijuana businesses. The vastness of the marijuana cash economy has prompted questions and concerns regarding the costs of it remaining an unbanked economy. How would businesses with such huge cash flows exist without basic banking services? Where would these billions of dollars be stored, protected? How much would money laundering crimes increase? Many in the U.S. question if their country will follow Canada’s lead in lifting the federal prohibition of marijuana. Indeed, there are bipartisan bills in the House, with numerous supporters, promoting the dismissal of criminal charges against those possessing or distributing marijuana. This is a huge legislative step as it would effectively remove marijuana from its current designation as a schedule 1 controlled substance, thus ending federal prohibition.
The end game is that the marijuana industry is not only here to stay, but growing at an alarming rate. This huge cash economy needs regulation like any other business industry. With the enormous projections of tax revenue generated by the industry, especially once legalized, the IRS will most certainly take their share in the form of taxes owed and paid.
Our tax attorneys in San Jose have been monitoring the situation as it relates to cannabis taxes and the IRS. We will make sure to update you in the future with any new developments.
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