The Latest IRS Initiative Could Positively Impact Cannabis

The tax man is extending a helpful hand to marijuana business owners, not something we would normally see for the cannabis industry. 

In an announcement posted on its website late last month, the Internal Revenue Service unveiled its new “Cannabis/Marijuana Initiative,” billed as a “groundbreaking effort” by the agency to assist such business owners as they navigate the often confounding U.S. tax code.

The goal of the initiative, the agency said, “is to implement a strategy to increase voluntary compliance with the tax law while also identifying and addressing non-compliance,” a move the IRS believes “will positively impact filing, payment and reporting compliance on the part of all businesses involved in the growing, distribution and sales of cannabis/marijuana.”

The agency said it has a number of “strategic activities” planned as part of the initiative, which include ensuring that “training and job aids are available to IRS examiners working cases so they can conduct quality examinations (audits) consistently throughout the country,” making sure “there is coordination and a consistent approach by the IRS to the cannabis/marijuana industry,” finding “ways to identify non-compliant taxpayers,” collaborating “with external stakeholders to increase an awareness of tax responsibilities to improve compliance” and giving “taxpayers access to information on how to properly comply with the filing requirements.”

Even as dozens of states have legalized marijuana for either medical or recreational marijuana use, and even as polls consistently show that majorities of Americans support legalizing marijuana outright, there remains a stubborn elephant in the room—cannabis is still listed on the Controlled Substances Act and is thus still illegal on the federal level. That makes things very difficult when it comes to tax breaks.

De Lon Harris, a commissioner at the IRS who authored the post on the initiative last month, alluded to that discrepancy as a motivation behind the new program.

Rather than just providing information on the IRS’ website, Harris said he intends to “engage with the cannabis/marijuana industry through speaking events and other outreach.” He said that he has hosted three such outreach events in the last year.

“It’s tricky from a business perspective, because even though states are legalizing marijuana and treating its sale as a legal business enterprise, it’s still considered a Schedule 1 controlled substance under federal law,” Harris wrote. “That means a cannabis/marijuana business has additional considerations under the law, creating unique challenges for members of the industry.  Specifically, these businesses are often cash intensive since many can’t use traditional banks to deposit their earnings. It also creates unique challenges for the IRS on how to support these new business owners and still promote tax compliance.”

Harris said that although IRS Code Section 280E establishes that “all the deductions and credits aren’t allowed for an illegal business,” there is a “caveat.”

“Marijuana business owners can deduct their cost of goods sold, which is basically the cost of their inventory. What isn’t deductible are the normal overhead expenses, such as advertising expenses, wages and salaries and travel expenses, to name a few,” he said. 

“I understand this nuance can be a challenge for some business owners, and I also realize small businesses don’t always have a lot of resources available to them. That’s why I’m making sure the IRS is doing what it can to help businesses with our new Cannabis/Marijuana Initiative,” Harris continued.

It may not be long before legalization goes federal. Democratic leaders on Capitol Hill like Senator Chuck Schumer have signaled that they are ready to press ahead with the reform. Earlier this year, Democratic members of the House introduced legislation that would both decriminalize and deschedule cannabis.