Banks won’t touch you, IRS just wants to tax you and the Feds want to close you down – despite California legalizing marijuana, these are the challenges marijuana businesses face everyday.
Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics. However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.
Banks Won’t Touch You
While states are opening their markets to marijuana, the illegality under Federal law still restricts cannabis businesses access to banking channels. However, guidance issued by the Financial Crimes Enforcement Network (“FinCEN”) on February 14, 2014 (FIN-2014-G001) clarified how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations, and aligned the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. Whilethis FinCEN guidance (which has yet to be revoked or changed)should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses, banks being conservative by nature are still overwhelmingly reluctant to provide banking services to this industry.
IRS Just Wants To Tax You
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.
Feds Want To Close You Down
The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.
The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:
- Does the business allow minors to gain access to marijuana?
- Is revenue from the business funding criminal activities or gangs?
- Is the marijuana being diverted to other states?
- Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
- Are violence or firearms being used in the cultivation and distribution of marijuana?
- Does the business contribute to drugged driving or other adverse public health issues?
- Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
- Is marijuana being used on federal property?
But now that as of January 4, 2018 Attorney General Jeff Sessions rescinded the Cole Memo, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws.
What Should You Do?
Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and other California locations. We can come up with solutions and strategies to these challenges and protect you and your business to maximize your net profits.