IRS Releases Cannabis Industry Web Page

October 05, 2020

By Miri Forster and Benjamin Aspir

In response to a March 30 report issued by the Treasury Inspector General for Tax Administration (TIGTA), the IRS recently released a cannabis industry landing web page with FAQs. The TIGTA report recommended that the IRS develop a comprehensive compliance approach for the cannabis industry, including a method for identifying businesses in the industry and monitoring examination results, developing and publicizing guidance specific to the industry, and providing increased education on relief provisions available to unbanked taxpayers making cash deposits.

The new industry web page includes FAQs related to tax and cash receipt reporting requirements. The FAQs make clear that the cannabis industry is subject to both income and employment tax and that cash transactions need to be reported like any other form of payment. In addition, the IRS has reiterated that IRC Sec. 280E limits the deduction of expenses incurred by a cannabis business, other than cost of goods sold (COGS). Therefore, how inventory is calculated for tax purposes under IRC Sec. 471 is vital for an industry that can only deduct COGS.  (For a detailed discussion of IRC Secs 471 and 280E, see “Tax Court Again Denies Cannabis Industry Deductions.”

Additionally, the cannabis industry has very limited banking access due to cannabis being illegal at the federal level. As a result, the high amount of cash handled by the industry has necessitated education on the requirement to report cash receipts greater than $10,000 (in a single transaction and/or related transactions) to the IRS. Penalty relief may be available on a case-by-case basis for taxpayers that lack access to banking and are required to make employment tax deposits electronically.

There have been a number of high profile tax court cases related to tax compliance by the cannabis industry. Many rulings have been government favorable, finding significant omissions of income in the industry and imposing a 20% negligence penalty. Also, the IRS position regarding IRC Sec. 280E has not changed and allowable deductions remain severely limited.  The cannabis industry should expect continued IRS enforcement, including IRC Sec. 280E audits going forward.   

About Ben Aspir

Benjamin Aspir is a Senior Tax Manager with expertise in tax, audit and accounting services. Member AICPA and New Jersey Society of Certified Public Accountants.

About Miri Forster

Miri Forster is a Principal and Co-Leader of the Tax Controversy Practice.

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