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Colorado Cannabis Companies Get Extra Attention from IRS

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money and marijuana, cannabusiness

Marijuana companies in Colorado are under increasing scrutiny by the Internal Revenue Service, according to a report this week by Marijuana Business Daily. The extra attention revolves around Form 8300, which businesses are required to file when they receive cash payments of $10,000 or more on single transactions.

Because marijuana businesses are, to this day, largely cash-only, transactions of that size are not uncommon. This is one of the many bad consequences of having cannabis listed as a Schedule I drug, since it makes it difficult for businesses to establish bank accounts with federally chartered financial institutions.

Now the increased scrutiny is making some companies wary.

“So I’m looking at this with my tax attorney, and it’s pretty serious,” one business owner (who wished to remain anonymous to avoid even more IRS attention) told MBD. “They’re not ruling out criminal charges. And, as a matter of fact, I know a couple of the audits have come from the fraud division of the IRS.”

Business owners and their tax attorneys are suspicious of the fed’s motives because 8,300 audits have been accompanied by questionnaires that probe into matters not necessarily relevant to the issue at hand, large cash payments. “Who monitors the water loss when you dry the product?” reads one question.

Ironically, the IRS says reporting these cash transactions is a way for a legitimate business to distinguish itself from, say, a dope dealer. “Drug dealers and smugglers often use large cash payments to ‘launder’ money from illegal activities,” according to an IRS FAQ. “Laundering means converting ‘dirty’ or illegally-gained money to ‘clean’ money,” the agency helpfully explains.

While weed-based businesses face daunting scrutiny for possible 8,300 violations, they are also under the IRS microscope more than other businesses generally. About 6.4 percent of cannabis companies were audited in 2014, compared with the national average of 1.4 percent for all businesses. (Interestingly, once audited, cannabusinesses are less likely to need corrections on their returns, suggesting that they are more meticulous – perhaps more scrupulous – than the average capitalist.)

As if the audits weren’t bad enough, cannabis companies get whacked harder on taxes than other enterprises as well. The federal tax code does not allow them to deduct labor costs, advertising, office supplies and other expenses that are typically written off by other types of business.

While the feds ramp up its interest in weed merchants, the business itself is booming. This week the Colorado Department of Revenue released data on cannabis sales for 2016 through May, which has so far tallied over $486 million in the state, a pace that will blow past the $1 billion mark by November. The attendant taxes and license fees should bring in around $150 million by year’s end, which might account for the taxman’s extra attention.

In spite of all this green, the onerous rules peculiar to the marijuana industry mean that some cannabusinesses are paying effective tax rates of more than 70 percent of their gross taxable income — or double the statutory rate for other US enterprises. That’s no way to run a sustainable business.

 

photo: Lochfoot

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