Medical Marijuana Taxes: What You Should Know
Learning more about Medical Marijuana Taxes
What Should I know about CA MMJ Taxes?
In addition to the myriad of regulatory requirements involved with MMJ
compliance, business owners must also ensure that they comply with state
and federal tax laws - especially as a failure to do so can result in
penalties, fines, auditing, or even criminal charges. Ensuring that your
tax returns are properly completed and filed is integral to avoiding the
expense, time, and frustration of being audited. Furthermore, incorrectly-filed
tax returns may affect your MJ business’s standing with the Bureau
of Medical Marijuana Regulation, which can result in both license denial
and your business losing priority status to receive a new license once
the MMRSA laws kick in.
Many MJ business owners are surprised to discover that - when it comes
to marijuana tax law adherence - it’s not just the returns themselves
that matter. Rather, tax laws affect day-to-day operations, and they can
help or hurt the costs of running an MJ business substantially. For example,
if your MMJ business includes sales tax in its advertised prices, you
may be held liable for additional taxes if your business has not complied
with your state’s standards. However, on the other hand, certain
purchases you make for your business may qualify for partial or even total
tax exemptions - meaning that you might be overpaying on taxes for those
items. At Feldmann Nagel Margulis, we have relationships with experienced
CPAs and attorneys that can help you both avoid audits and ensure that
your business doesn’t overpay when tax season rolls around.
Why are MJ businesses taxed differently than other businesses?
Medical and recreational marijuana businesses face a number of hurdles
regarding tax deductions, particularly when compared to other U.S. business
entities. This is because marijuana remains illegal under federal law.
Put simply, even if your business is in a state where medical marijuana
is legal, when it comes to federal taxes, the government refuses to recognize
most deductions associated with items it considers illegal - especially
marijuana. Unfortunately, this means that marijuana business owners face
taxes substantially higher than other businesses do, and it also mandates
that owners must tread carefully when preparing their returns.
While most states take more forgiving approaches when it comes to tax deductions,
this does not mean that state filings require less caution than federal
ones - particularly because your state grants and renews your operating
license. Regulatory changes, accurate records keeping, and taxes unique
to municipalities all individually affect your state tax returns, and
there’s no “one-size-fits-all” formula: you must stay
abreast of these varying requirements every year, and even potentially
every week, if you want to lawfully continue your business operations.
Marijuana is illegal under the federal government - how can they tax it?
Insofar as taxes are concerned, the federal government does not differentiate
between income from legal sales and income from illegal ones. Instead,
it considers gross sales - whether gained lawfully or not - to be essentially
blanket-policy taxable, regardless of legal status. This means that, while
Uncle Sam can press federal criminal charges for marijuana-based activity,
he still expects the taxes on that activity paid. Failure to file federally
- or incorrectly-filed returns - could result in tax evasion or fraud
charges, which are completely distinct from federal criminal ones.
What MJ business expenses can I deduct on my tax returns?
It depends. Generally speaking, federal tax returns strictly limit deductions,
given that marijuana is federally illegal, while states that have legalized
marijuana in some form may offer friendlier tax advantages for MJ businesses.
However, available deductions vary from state to state, depend on whether
your facility is medical or recreational, and may be affected by municipal
taxes. So, in short: there is no answer that applies to everyone.
Federal returns face the most limitations. MJ businesses may only deduct
the cost of goods sold (COGS) from their federal taxes. However, what
exactly constitutes a business’s COGS remains a little fuzzy. Basically,
a MJ business owner calculates its COGS by adding its beginning inventories
to either its current-year production costs (if a producer) or purchases
(if a reseller); then, the amount of year-end inventories needs to be
subtracted. The final total is the cost of goods sold.
However, determining what constitutes valid “production costs”
can be difficult - some expenses are allowed, while others are not, and
they all depend on the exact nature of your individual marijuana business.
Different states have varying approaches to tax-deductible items. For example,
California allows some deductions and partial exemptions for items such
as seeds, advertising materials, computers, and operating expenses. However,
how many deductions your MJ business may take again depends largely on
how your business operates.
Ultimately, because of the complicated nature of taxes in the marijuana
business industry, meeting with a professional adviser is the best way
to ensure that you know not only what deductions are available but also
which ones your particular business may utilize (not to be construed as