Tax Tips for Marijuana Businesses – Avoid IRS Collections
Running a business is no easy task; there’s overhead, maintaining a steady stock of product, ensuring good customer service, marketing and more. Then there is the issue of taxes, which causes a great deal of stress for all business owners—but particularly for medical marijuana dispensaries. Medical marijuana tax collections are detailed and incredibly involved, and there are clear, distinct differences in tax collections for marijuana businesses compared to conventional retail stores. For example, if a medical marijuana dispensary doesn’t comply with certain provisions, they have a higher chance of facing an audit, and the ensuing collections process, among other headaches. In fact, many medical marijuana businesses can’t withstand the pressure and close up shop almost immediately after opening their doors. Fortunately, there are some steps any legal marijuana business can take to ensure as much protection as possible from the IRS.
What You Should Know Before Opening a Medical Marijuana Business
It’s no secret that medical marijuana comprises a large proportion of tax revenue, particularly in Colorado, the most recent state to legalize recreational pot use. Marijuana tax collections clocked in at around $70 million during the 2014 fiscal year, surpassing that of alcohol. This sounds quite impressive, but there’s something that these numbers aren’t telling.
The marijuana business is tightly regulated, confusing, and downright hazy when it comes to tax rules. One of the reasons the IRS collects a large proportion of profits as taxes in the marijuana industry is that dispensaries aren’t allowed to deduct normal business expenses such as rent, employee pay, or the costs related to marketing. Why? Medical marijuana is still considered an illegal substance at the federal level, making it harder for businesses that dispense the herb to make positive financial gains. Even those businesses that receive a sizable and consistent income struggle to stay afloat because of the high tax rates. These can reach up to 70% of gross revenues due to the inability to take deductions.
Why and How You Need to Report Your Medical Marijuana Income
Many owners of medical marijuana dispensaries, even those who have been in business for more than a decade, don’t understand the complexity of reporting earnings and medical marijuana tax collections. No matter how careful a company is with tax preparation, there’s always a chance of receiving an audit by the IRS. An audit for a medical marijuana business is by no means enjoyable, and in some instances it can result in the closing of a business.
If a company does not report its marijuana income, it puts the business at high risk for an audit or even criminal charges for perjury or tax evasion. Fail to file a tax return, and the IRS will file one for you! And chances are you will be hit with a large tax bill based on estimated gross receipts with no deductibles, plus interest and penalties.
Even if you do give an honest accounting of what you’re making, there’s a risk it will be used against you in a criminal case for federal drug trafficking.
The IRS Always Gets Its Money
The best thing you can do is to report your income honestly and pay your tax obligation in full when it is due. When you owe money to the IRS, the collections process begins. The IRS will assign a local revenue officer to come visit you, usually unannounced, in an effort to collect payment and determine your ability to pay. They will give you a list of demands and ask for information – information that could be used against you.
If your company is faced with the collections process, you need to contact your tax attorney as soon as possible to find a way to pay the IRS what it is owed. You should never refuse to answer questions about the current financial situation of your business, but the specifics of how you make your money doesn’t necessarily have to be communicated. A professional and experienced tax attorney is essential when navigating this minefield.
The Importance of Working with a Marijuana Tax Lawyer
Waiting for an audit or the tax collections process is a bad plan and could result in the end of your business. As a responsible business owner, you want to make sure you have a tax lawyer you can trust at all times. Even answering simple questions, such as your line of business, can lead to mistakes that result in a big tax bill or jail time.
It’s not enough to have an accountant. You need the confidentiality privileges that come with an attorney-client relationship. Your accountant can’t provide that protection and can be subpoenaed and compelled to testify against you in court. If you do get audited, or enter collections, consulting a tax attorney with knowledge of the medical marijuana industry is key for ensuring a stable and successful business.
Ayar Law Group is highly experienced at working with medical marijuana dispensaries and helping them navigate the murky waters of medical marijuana tax collections. If you want to know more or have questions about your business, contact us today.