Written by Derek Davis, Owner of California Cannabis CPA
At California Cannabis CPA, one of our main areas of focus is compliance with local, state and federal statutory guidelines. We often get numerous questions fielded regarding record keeping requirements for Marijuana related business owners. We do hope this post is able to answer your questions.
State-legal marijuana-related businesses in the United States are currently operating in a legal grey area. Despite the passage of laws legalizing certain marijuana-related activities in 25 states and the District of Columbia, the production, distribution and sale of marijuana is still illegal under federal law. However, every marijuana-related business is still required to pay federal income tax on its taxable income per IRC § 61(a).
In addition, the IRS Office of Chief Counsel issued Chief Counsel Advice (CCA) 201504011, issued in 2015, which confirmed that the IRS has broad authority to challenge the accounting method and deductions claimed for any marijuana-related business. Without proper record keeping, marijuana-related businesses put themselves at a much greater risk of losing an IRS tax investigation. As a result, proper record keeping is essential for businesses in an industry that has been only partially legitimized.
In light of the risks of operating a cannabis-related business, every business owner should be aware of the records that need to maintain. Accurate records are required to prove the existence of a serious and legitimate business.Here are the proper record keeping requirements for canna-business owners.
Maintain Specific Records That Detail All Legal Cost of Goods Sold ("COGS") Deductions
Under § 280E, marijuana-related businesses are prohibited from taking deductions and credits for trafficking marijuana. However, the law does not disallow deductions for costs of goods sold (COGS) related to the legal parts of their businesses. To maintain this distinction, marijuana resellers should physically separate the square footage in their retail locations so that they can maintain clear and direct records with regards to COGS deductions.
Report All Cash Transactions
While marijuana-related businesses generally choose to do business in cash because of the lack of payment processing options available to them, these business must create and maintain accurate reports of cash transactions, including sales, employee wages, and vendor payments. For payments over $10,000, reporting is required by the IRS. Businesses, receiving more than $10,000 in cash from a single buyer as a result of one transaction or two or more related transactions, must report these earnings via Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Copies of the filed forms should be maintained for 5 years.
The IRS also requires that you deliver a statement to the customer who made the payment by January 31st of the following fiscal year, which details the total amount of cash your business received within a 12-month period.
Enforce a Record Keeping System
To make things easier for your business, setup a system to keep an electronic or paper copy of every receipt. Make sure to include a detailed description with every expense record so that you can validate your tax filings to the IRS.
Following these simple tips will not only make it easier for you to prepare your federal tax return, it will also help to ensure you are doing your best effort to comply with the respective rules and regulations. If you need assistance with setting up a record keeping system for your canna-business, please feel free to contact us.