I have never tried Marijuana and don’t plan on ever trying it even though it is now legal in my state of Colorado. I tried smoking (tobacco) a few times, but never found a reason to continue, and I certainly didn’t make a habit of it. Don’t get me wrong, I like an occasional drink and I love going to casinos and playing the lottery once and a while.
So why would I be talking about a drug on an accounting blog? Well, the tax problems created by making it legal here in Colorado, and a few other states, are just fascinating to me. You see, marijuana is still illegal at the federal level. That means these businesses are faced with some very strange tax regulations.
At the Federal level, for income tax purposes, any money earned from an illegal activity must be reported as income, however any expense related to those illegal activities cannot be deducted. That means what would be an expense for most businesses, such as rent, office supplies, or telephones cannot be taken as an expense for a marijuana business of any kind. You would think the Federal government would be happy about this because that means that all these businesses must pay income tax on the gross income for their business where all other businesses are paying taxes on the net income (sales, less expenses). They have come up with a few ways to get around this such as having 2 separate businesses: one that sells just the Marijuana, and one that sells other things such as the paper to wrap joints in. The key at the Federal level would be to make sure the distinction is made very clear cut, or you could end up having all the expenses for the second business also be deemed non-deductible.
Another issue, marijuana stores still haves to pay things such as payroll taxes and other bills. But at the Federal level, if a bank knowingly allows an illegal business to have a checking account, or any other type of account with them, the bank can lose its federal backing. Then none of the accounts held in that bank would be covered by the FDIC (Federal Deposit Insurance Corporation). This forces businesses that are legal in the State but illegal by Federal law to hold onto all of their cash, and conduct business only with cash. When was the last time you tried to pay your electric bill with cash? When paying payroll taxes, especially at the Federal level, you can actually get fined up to 10% of the tax when you do not use the EFTPS (electronic) system of payment. So by paying with cash for federal tax deposits, these businesses not only must trust the mail with large sums of cash, but they also get penalized because they can’t open a bank account.
At the State level they have a different problem. They still can’t open a bank account so things like sales tax and state payroll taxes must be paid in cash. The biggest problem is that at the state level they can deduct all the normal business expenses such as the cost of purchasing merchandise, that means they have to calculate their state taxes in a completely different manner than for the Feds.
Hopefully, your tax situation may not be as complicated as a new marijuana business, but planning for your taxes is still just as important – call or schedule an appointment today to see how we can save you money on taxes.