Medical Marijuana Taxes: What You Should Know

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.

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.

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.

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 tax advise).