Cannabis Law Group's Medical Marijuana Legal Blog
California Cannabis Tax Compliance, Banking Continue to be Challenges in 2022
Heading into the new year, California cannabis company tax compliance and banking will continue to be challenges. Marijuana retailers, growers, product makers and others in the industry would be wise to work closely with an experienced Los Angeles cannabis business attorney to help them navigate these ongoing difficulties. 
Recently, the Internal Revenue Service (IRS) issued tips for cannabis compliance. The federal agency noted that while it’s outside of the agency’s power to resolve many of the unique business predicaments that arise from federal prohibition, it wants to help support cannabis companies in becoming tax compliant. Even though marijuana continues to be classified as a Schedule I narcotic by federal authorities, these businesses are still required to shell out federal taxes.
In September, the agency released tips for tax compliance for cannabis businesses. Among those:
- Know your investors. Thousands of people are fighting to get into the industry, but working with investors may have some tax implications and repercussions for cannabis companies. Unregistered and “silent” financing and ownership arrangements, with investors sometimes being referred to as “beneficial owners,” get the benefits of ownership but avoid having the property title or activity in their name. That creates numerous challenges for the IRS, and it may result in issues for proper tax filing and accurate reporting of gross receipts. Also, cannabis business owners should be wary of nefarious investors who attempt to put their funds into a business like this, but jeopardize the entire operation with allegations of money laundering.
- Make sure you’re licensed. You can’t get federal licensing, but make sure you have proper state and local licensing for your operation.
- Timely file and pay your taxes. Even if your business operates with cash, you’re still responsible to file and pay your taxes on time. IRS code doesn’t parse out which income stems from legal vs. illegal sources. All income must be reported. Note that because you’re dealing with a Schedule I narcotic, you must abide by Section 280E – even if your business is 100 percent state legal. That section doesn’t bar you from reducing gross receipts by properly calculating the cost of goods sold to ascertain gross income, though you may not be able to deduct things like selling or advertising expenses. There aren’t any exemptions from employment tax. It may be beneficial to make quarterly payments. Late payments can result in interest and penalties. Non-filers are a priority enforcement for the IRS. So too are those who use cryptocurrency; it’s imperative to use a reputable exchanger.
- Report cash transactions. Your business may not use traditional banking, but you still need to report all cash transactions. Any company receiving $10,000 or more in cash (which is most California marijuana businesses) need to file Form 8300 within 15 days of receiving that payment. Failure to be diligent about this can cause major headaches for your business.
- Maintain good records. This is mission critical for a cannabis business. Keeping meticulous records – all receipts, canceled checks, any shred of documentation that can support income, deduction, or credit should be kept in some form. Keep these records even for expenses that aren’t legally deductible because it’s going to make it easier to prepare your returns and also answer a question quickly if one arises.
California has been hailed with potential to rein as the world’s largest regulated marijuana market on the planet, but currently trails in per-capita sales when compared with other recreational markets across the United States. Much of this can be attributed to California’s rampant illicit cannabis market, and further compounded by the state’s stringent regulation requirements for lawful cannabis businesses.
California has not been as quick to block flavored e-cigarette, tobacco or cannabis vape products as other states across the country. But that could all soon change.
As California’s legal marijuana industry continues to bloom, so too does a well-stocked black market, comprised of unlicensed, locally grown cannabis, and a plethora of counterfeit cannabis products.
California’s unlicensed farmers in Humboldt County are on notice, with a new crackdown on cannabis growing now in effect. After issuing 1,500 provisional cannabis licenses, state and local authorities are increasingly pursuing farmers for operating without permits.