President Trump Seeking To Prosecute Legalized Adult-use Marijuana Businesses
On June 20, 2019, the House of Representatives voted to restrict the Department Of Justice (“DOJ”) from interfering with States that have legalized adult-use marijuana, including those allowing recreational use, cultivation and sales. This amendment was attached to a large-scale appropriations bill to fund parts of the federal government for Fiscal Year 2020.
But under the 2021 Federal Budget released by the Trump Administration, President Trump proposes slashing all legal protection for state medical marijuana programs which would open the door for the Drug Enforcement Administration (“DEA”) and other federal law enforcement agencies to use federal funds to shut down medical marijuana programs.
Marijuana Remains Illegal Under Federal Law
The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.
House Appropriations Bill Amendment
The Blumenauer McClintock Amendment sponsored by Reps. Earl Blumenauer (D-OR), Eleanor Holmes Norton (D-DC) and Tom McClintock (R-CA) that was included in the appropriations bill to fund parts of the federal government for Fiscal Year 2020, states that:
None of the funds made available under this House Appropriations Bill to the Department of Justice may be used to prevent to any State, territory or D.C. from implementing their own laws that authorize the use, distribution, possession, or cultivation of marijuana.
In the past such amendment (starting in 2014) was limited to medical marijuana state-licensed business but this expansion is huge given that nearly one in four Americans reside in a jurisdiction where the adult use of cannabis is legal under state statute.
Medical marijuana is legal in 33 states.
The medical use of cannabis is legal (with a doctor’s recommendation) in 33 states and Washington DC. Those 33 states being Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Maine, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.
Recreational marijuana is legal in 11 states.
Eleven states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those ten states being Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington and the territory of Guam.
Amendment Spearheaded By Rep. Earl Blumenauer, co-founder of the Congressional Cannabis Caucus.
The amendment was voted in by Congress in a 267 to 165 bipartisan vote. “It’s past time we protect all cannabis programs,” said Rep. Earl Blumenauer. “We have much more work to do. The federal government is out of touch and our cannabis laws are out of date. I’m pleased that the House agrees and we are able to move forward.”
The fate of whether this amendment will continue in the 2021 Federal budget is unknown for now. Historically the Senate’s Appropriations Committee has been relatively open to attaching marijuana riders to spending bills, and has consistently approved the medical cannabis protections, but the body’s Republican leadership may be reluctant to go against President Trump’s wishes when it comes to enforcing federal prohibition against licensed businesses and consumers in states that allow marijuana use and sales.
Keep in mind that if this amendment is part of the 2021 Federal budget that ultimately gets approved, to avail yourself of the protections of the amendment, you must be in complete compliance with your State’s cannabis laws and regulations.
But until Federal law changes, the cannabis industry will still have to bear the followings risks and challenges:
Higher Taxes Still Remain
It still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.
Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.
Reporting Of Cash Payments Still Remain
The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file
IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.
Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.
How Do You Know Which Cannabis Tax Attorney Is Best For You?
Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government especially if President Trump’s budget proposal slashing all legal protection for state medical marijuana programs passes. While cannabis is legal in California, that is not enough to protect you. It’s coming down that the biggest risk is TAXES. Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Los Angeles and other California locations protect you and maximize your net profits. And if you are involved in crypto currency, check out what a Bitcoin Tax Attorney can do for you.