Requirement For Banks & Financial Institutions To Report Beneficial Ownership Information Of Entity Accountholders Put On Hold

The Federal government in its efforts to crack down on illicit finance and enhance transparency on September 29, 2022 issued a final ruling establishing a beneficial ownership information reporting requirement, pursuant to the Corporate Transparency Act (CTA). This rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners – the persons who ultimately own or control the company – to the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Law Invalidated Less Than One Month Before Reporting Deadline

On December 3, 2024 Judge Amos L. Mazzant III of the US District Court for the Eastern District of Texas issued the injunction at the request of a family-run firearms and tactical gear retailer, called Texas Top Cop Shop Inc., among other co-plaintiff businesses and the Libertarian Party of Mississippi. Their lawsuit alleged that the CTA falls outside of Congress’s powers to regulate interstate and foreign commerce because it regulates incorporated entities regardless of whether they engage in commercial activity.

In issuing the Court’s Opinion (Texas Top Cop Shop, Inc. v. Garland, E.D. Tex., No. 4:24-cv-00478, 12/03/2024), the Court agreed that the law’s requirements exceed Congress’s commerce authority.  “For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government,” Mazzant wrote.

Last week, the government appealed the preliminary injunction granted by the district court that enjoins enforcement of the CTA.  On December 17, 2024, the U.S. District Court for the Eastern District of Texas issued an Order denying the government’s motion to stay the nationwide preliminary injunction.  It is likely that this Order is the last formal decision on the CTA prior to December 31, 2024 that would require filing (at least filing prior to December 31, 2024.

Purpose Of Reporting

Designed to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system, FINCEN stated that this ruling will help to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.

“For too long, it has been far too easy for criminals, Russian oligarchs, and other bad actors to fund their illicit activity by hiding and moving money through anonymous shell companies and other corporate structures right here in the United States,” said Acting FinCEN Director Himamauli Das. “This final rule is a significant step forward in our efforts to support national security, intelligence, and law enforcement agencies in their work to curb illicit activities. The final rule will also play an important role in protecting American taxpayers and businesses who play by the rules, but are repeatedly hurt by criminals that use companies for illegal reasons.”

Reporting Companies

The CTA broadly defines a “reporting company” as any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.

Entities Not Required To Be Reported

There are certain entities that are excepted from being reported: (1) entities in certain regulated industries that already are subject to beneficial ownership reporting, (2) publicly traded companies, (3) investment vehicles operated by investment advisors, nonprofits, and government entities, and (4) “qualified exempt entities”.  A “qualified exempt entity” is an entity that (a) employs more than 20 employees; (b) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (c) has an operating presence at a physical office within the United States.

Beneficial Owners and the Information to Report

The CTA defines a “beneficial owner” of an entity as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25% equity in the entity. The rule expressly excludes certain individuals from the definition of beneficial ownership, including (1) a minor child (as long as the child’s parent’s or guardian’s information is reported); (2) an individual acting as an intermediary or agent on behalf of another; (3) a person whose control over a reporting company derives solely from their employment; (4) an individual whose only interest in a reporting company is through a right of inheritance; or (5) a creditor of a reporting company (unless they qualify as a “beneficial owner” through substantial control or equity ownership).

What Information Gets Reported

In each report to FinCEN, a reporting company must provide each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver’s license or passport).

Effective Date Is January 1, 2024.

The rule is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information.

The reporting rule is one of three rulemakings planned to implement the CTA. FinCEN will engage in additional rulemakings to: (1) establish rules for who may access beneficial ownership information, for what purposes, and what safeguards will be required to ensure that the information is secured and protected; and (2) revise FinCEN’s customer due diligence rule. In addition, FinCEN stated it continues to develop the infrastructure to administer these requirements, including the information technology system that will be used to store beneficial ownership information in accordance with the strict security and confidentiality requirements of the CTA.

FinCEN Issues Guide to Assist Small Businesses with Beneficial Ownership Reporting: The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf  to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule that became effective on January 1, 2024 under the Corporate Transparency Act.

Penalties for Violating CTA

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine BOI Ownership Information report may be held accountable for that failure. However, the CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. While the law is put on hold for now, you can expect the laws regarding customer due diligence requirements for financial institutions will also be updated to conform to the CTA as the CTA will be providing a new means for a financial institution to verify a customer’s “Know Your Customer” information.  If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. In addition, tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. can complete or update BOI reporting for your business. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

New Rights For California Freelancers – What You Need To Know About The Freelance Worker Protection Act

On September 28, 2024 California Governor Gavin Newsom signed Senate Bill 988, the Freelance Worker Protection Act. Senate Bill (SB) 988 provides basic labor protections for freelance workers, such as the right to be paid on time and in full.

Most freelancers lack basic worker protections, most notably, the right to be paid for their work on time. According to the Freelancers Union, 71% of workers experienced late or non-payment. 59% report living paycheck to paycheck. Most do not have written contracts, as only 25% reported that they consistently have written contracts.

What Is In The Freelance Worker Protection Act?

• Mandatory contracts: Any freelancer performing over $250.00 of work for a hiring entity over a four month period is entitled to a contract outlining the scope of the work expected, the rate of pay, and the method of payment.
• 30-day payment terms: Clients must pay their freelancers within 30 days of completion of work unless otherwise specified in the contract.
• Payment agreement protections: Clients cannot require that freelancers accept less than the contract stipulates in exchange for faster payment.
• Anti-retaliation: Clients cannot retaliate against freelancers for pursuing payment.
• Double Damages: Freelancers who are the victim of non-payment are entitled to damages equal to double the payment originally specified in their contract, plus costs and attorney’s fees.

How Is A “Freelancer” Different From An “Independent Contractor”?

Freelancers and Independent Contractors are independent workers who control when, where, and how they work. They are considered self-employed. Both can work remotely unless the job requires the independent contractor to be on-site to perform their services. While they are classified the same for tax purposes, the types of projects and contracts freelancers and independent contractors work on are different.

Freelancers work project-to-project for clients, often balancing multiple contracts and clients at once. The engagement can be a longer-term hourly contract or a “one-off” project. Freelancing may offer less stability but gives talent more flexibility and control of their work. Freelancers are experts who fill skills gaps on a team, working on specific projects rather than a wide scope of work.

Independent contractors are more position-based. They work with clients on fixed-term contracts that could be full or part time.  Duration is usually longer – sometimes for years. Contract roles offer reliable pay for the duration of the contract and could even become full time once the contract ends. Independent contractors typically have a broader skill set than freelancers.

California law updated in 2020 to expand independent contractor status

California Assembly Bill (“AB”) 5 codified the California Supreme Court holding in Dynamex Operations West, Inc. v. Superior Court and adopted the “ABC” test to determine whether independent contractors should be treated as employees with various exceptions.  Effective January 1, 2020 under the “ABC” test, workers are presumed to be employees unless they satisfy three conditions:

1. The worker is free from the employer’s control and direction in connection with the work performed, both under the contract and in fact;
2. The work performed is outside the usual course of the employer’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Under AB 5, certain occupations were excluded from the ABC test, including doctors, lawyers, dentists, licensed insurance agents, accountants, architects and engineers, private investigators, real estate agents, and hairstylists.

Since the enactment of AB 5, the California Legislature introduced subsequent legislation (AB 257) to allow more workers to be treated as independent contractors by increasing the availability of exemptions to the ABC test as follows:

• Translators, appraisers, home inspectors and registered foresters.
• For the entertainment industry to include recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians, vocalists, music album photographers, independent radio promoters, and certain publicists.
• For referral agencies to include consulting, youth sports coaching, caddying, wedding and event planning, and interpreting services.

Lastly, in November 2020, California voters passed Proposition 22 which allows workers in the gig economy that serve as app-based drivers to be treated as independent contractors.

IRS implementation of $600 reporting threshold for third-party payment platforms’ Forms 1099-K

If you are using payment apps like PayPal, Venmo, Square, and other third-party electronic payment networks to for clients paying for your services, payment app providers will have to start reporting to the IRS a user’s business transactions if, in aggregate, they total $600 or more for the year. The reporting form to use is a Form 1099-K.  A business transaction is defined as payment for a good or service.

Prior to 2024, app providers only had to send the IRS a Form 1099-K if an individual account had at least 200 business transactions in a year and if those transactions combined resulted in gross payments of at least $20,000.  Form 1099-K is used to report certain payments that you received for selling goods or providing services, not making purchases.

The expansion of the reporting rule is the result of a provision in the American Rescue Plan, which was signed into law in 2021 but the implementation by IRS has been delayed to calendar year 2024. The IRS is looking to use this information to uncover unreported income and recover lost tax revenues.

Four tips you should know about how the gig economy might affect your taxes:

1. The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

2. Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 57.5 cents per mile for the first 6 months of 2022 and 62.5 cents for the last 6 months of 2022. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

3. You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will lose out on a lot of deductions and pay a lot more in taxes.

4. Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments for the 2023 tax year are due on April 18, 2023, June 15, 2023, September 15, 2023 and January 15, 2024. Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, gig economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

If you are a freelancer and the payor of your services is not complying with the Freelance Worker Protection Act, you should contact legal counsel to protect your rights and insure payment.  Also, keep in mind that as the gig economy continues to grow, so do the associated tax problems. The IRS obviously is interested in freelancers and independent contractors who earn money from their services no matter where they are located. That is why it’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you need help filing the 1099-K form, taxes, or are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling legal and tax matters for freelancers and independent contractors and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Corporate Transparency Act Blocked Nationwide by Texas Court

Requirement For Banks & Financial Institutions To Report Beneficial Ownership Information Of Entity Accountholders Put On Hold

The Federal government in its efforts to crack down on illicit finance and enhance transparency on September 29, 2022 issued a final ruling establishing a beneficial ownership information reporting requirement, pursuant to the Corporate Transparency Act (CTA). This rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners – the persons who ultimately own or control the company – to the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Law Invalidated Less Than One Month Before Reporting Deadline

On December 3, 2024 Judge Amos L. Mazzant III of the US District Court for the Eastern District of Texas issued the injunction at the request of a family-run firearms and tactical gear retailer, called Texas Top Cop Shop Inc., among other co-plaintiff businesses and the Libertarian Party of Mississippi. Their lawsuit alleged that the CTA falls outside of Congress’s powers to regulate interstate and foreign commerce because it regulates incorporated entities regardless of whether they engage in commercial activity.

In issuing the Court’s opinion (Texas Top Cop Shop, Inc. v. Garland, E.D. Tex., No. 4:24-cv-00478, 12/3/24.), the Court agreed that the law’s requirements exceed Congress’s commerce authority.  “For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government,” Mazzant wrote.

Purpose Of Reporting

Designed to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system, FINCEN stated that this ruling will help to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.

“For too long, it has been far too easy for criminals, Russian oligarchs, and other bad actors to fund their illicit activity by hiding and moving money through anonymous shell companies and other corporate structures right here in the United States,” said Acting FinCEN Director Himamauli Das. “This final rule is a significant step forward in our efforts to support national security, intelligence, and law enforcement agencies in their work to curb illicit activities. The final rule will also play an important role in protecting American taxpayers and businesses who play by the rules, but are repeatedly hurt by criminals that use companies for illegal reasons.”

Reporting Companies

The CTA broadly defines a “reporting company” as any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.

Entities Not Required To Be Reported

There are certain entities that are excepted from being reported: (1) entities in certain regulated industries that already are subject to beneficial ownership reporting, (2) publicly traded companies, (3) investment vehicles operated by investment advisors, nonprofits, and government entities, and (4) “qualified exempt entities”.  A “qualified exempt entity” is an entity that (a) employs more than 20 employees; (b) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (c) has an operating presence at a physical office within the United States.

Beneficial Owners and the Information to Report

The CTA defines a “beneficial owner” of an entity as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25% equity in the entity. The rule expressly excludes certain individuals from the definition of beneficial ownership, including (1) a minor child (as long as the child’s parent’s or guardian’s information is reported); (2) an individual acting as an intermediary or agent on behalf of another; (3) a person whose control over a reporting company derives solely from their employment; (4) an individual whose only interest in a reporting company is through a right of inheritance; or (5) a creditor of a reporting company (unless they qualify as a “beneficial owner” through substantial control or equity ownership).

What Information Gets Reported

In each report to FinCEN, a reporting company must provide each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver’s license or passport).

Effective Date Is January 1, 2024.

The rule is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information.

The reporting rule is one of three rulemakings planned to implement the CTA. FinCEN will engage in additional rulemakings to: (1) establish rules for who may access beneficial ownership information, for what purposes, and what safeguards will be required to ensure that the information is secured and protected; and (2) revise FinCEN’s customer due diligence rule. In addition, FinCEN stated it continues to develop the infrastructure to administer these requirements, including the information technology system that will be used to store beneficial ownership information in accordance with the strict security and confidentiality requirements of the CTA.

FinCEN Issues Guide to Assist Small Businesses with Beneficial Ownership Reporting: The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf  to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule that became effective on January 1, 2024 under the Corporate Transparency Act.

Penalties for Violating CTA

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine BOI Ownership Information report may be held accountable for that failure. However, the CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. While the law is put on hold for now, you can expect the laws regarding customer due diligence requirements for financial institutions will also be updated to conform to the CTA as the CTA will be providing a new means for a financial institution to verify a customer’s “Know Your Customer” information.  If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. In addition, tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. can complete or update BOI reporting for your business. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

During President Trump’s 2016 campaign, he supported medical marijuana and deferred recreational use decisions to individual states. However, his first administration took a stringent approach, with then Attorney General Jeff Sessions rescinding Obama-era guidelines that limited federal interference in state-legal cannabis activities.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical marijuana is legal in 38 states and Washington DC, and soon to be 39 states with the passage of medical marijuana in Nebraska in the 2024 election

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Nebraska will soon be the 39^th state to legalize it with the recent passage of the medical marijuana measure in the 2024 election. Currently, the 38 states with medical marijuana legal include Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 23 states and Washington DC

Twenty-three states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 23 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

Conflict With Federal Law.

Under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

What To Consider In A Second Trump Administration

During the 2024 election campaign, Trump expressed support for reclassifying marijuana from a Schedule I to a Schedule III substance under the Controlled Substances Act. He stated, “It is time to end needless arrests and incarcerations of adults for small amounts of marijuana for personal use.”  He also voiced support for marijuana industry access to the banking system and the federal cannabis rescheduling process initiated by the Biden administration. Furthermore, Trump also endorsed Florida’s Amendment 3, a ballot initiative aimed at legalizing recreational marijuana for adults 21 and older.  However, even though 55.9% of Floridians voted in favor of it (including Trump who is a Florida resident), the amendment in Florida did not pass as a 60% vote is required.

While Trump’s recent statements on cannabis suggest a shift toward reform, his administration’s past actions reflect a more stringent approach. Time will tell how the second Trump administration will handle cannabis. In the 2024 election, Republicans reclaimed a majority in the Senate, and while the political makeup of the House is still to be determined, chances are it will most likely be controlled by Republicans. As any president’s ability to unilaterally change federal marijuana laws is limited and favorable judicial intervention is unlikely, it is up to congress to launch substantial cannabis reform which under the anticipated makeup of congress is more unlikely to happen.

Trump’s Nomination Of Representative Matt Gaetz for Attorney General

On November 13, 2024 Trump nominated Representative Matt Gaetz for Attorney General. If Gaetz gets confirmed by the Senate as Attorney General the state-level cannabis marketplace may not be impeded under the Trump administration, which would be a massive change from Trump’s first term. In addition, this could be positive for the ongoing Biden administration-led marijuana rescheduling effort that Trump has endorsed. Gaetz has a history of voting in favor of or speaking up in favor of cannabis becoming legal. Gaetz helped sponsor the first medical marijuana law passed by the Florida Legislature in 2014, which permitted the use of a noneuphoric, low-THC cannabis to treat conditions such as epilepsy. In addition, Gaetz was one of three Republican members of the House to approve a Democratic-led bill to federally legalize marijuana titled the Marijuana Opportunity Reinvestment and Expungement (MORE) Act in 2022. In 2023, Gaetz proposed an amendment in the National Defense Authorization Act which would end cannabis testing for members of the military — both when they are enlisting and accepting a commission. Furthermore, last year Gaetz also stated that he’s concerned that if the federal government doesn’t “go further” than simply moving marijuana to a lower drug schedule, large pharmaceutical companies might be able to overtake the cannabis industry. While Gaetz voted in favor of a federal legalization bill in 2022, he said in August 2024 that cannabis reform should be enacted statutorily instead of through an amendment to each States’ constitution so the Federal government can more easily adjust the law in the future.

But despite the possibility of a cannabis-friendly Department Of Justice, the cannabis industry still faces risks that non-cannabis businesses do not face.

Risk Of Losing All Bank Privileges

While states are opening their markets to marijuana, the illegality under Federal law still restricts cannabis businesses access to banking channels. On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) which is a division of the Department Of Treasury issued guidance (FIN-2014-G001) clarifying how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations, and aligned the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This FinCEN guidance issued by the Department Of Treasury was following the Cole Memo issued by the DOJ. But now that the Cole Memo has been rescinded, the FinCEN guidance is not has persuasive leading many banks to turn away cannabis businesses. For those cannabis businesses that have eluded banks with their true business activity (which such misrepresentation is also a Federal crime), those businesses run the risk of having their bank accounts shut down by the bank when the bank learns of their true business activity so it is important to secure qualified legal counsel to come up with solutions that will allow you to still conduct business and meet financial obligations.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California and several other states, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  Your need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits. Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

During President Trump’s 2016 campaign, he supported medical marijuana and deferred recreational use decisions to individual states. However, his first administration took a stringent approach, with then Attorney General Jeff Sessions rescinding Obama-era guidelines that limited federal interference in state-legal cannabis activities.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical marijuana is legal in 38 states and Washington DC, and soon to be 39 states with the passage of medical marijuana in Nebraska in the 2024 election

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Nebraska will soon be the 39^th state to legalize it with the recent passage of the medical marijuana measure in the 2024 election. Currently, the 38 states with medical marijuana legal include Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 23 states and Washington DC

Twenty-three states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 23 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

Conflict With Federal Law.

Under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

What To Consider In A Second Trump Administration

During the 2024 election campaign, Trump expressed support for reclassifying marijuana from a Schedule I to a Schedule III substance under the Controlled Substances Act. He stated, “It is time to end needless arrests and incarcerations of adults for small amounts of marijuana for personal use.”  He also voiced support for marijuana industry access to the banking system and the federal cannabis rescheduling process initiated by the Biden administration. Furthermore, Trump also endorsed Florida’s Amendment 3, a ballot initiative aimed at legalizing recreational marijuana for adults 21 and older.  However, even though 55.9% of Floridians voted in favor of it (including Trump who is a Florida resident), the amendment in Florida did not pass as a 60% vote is required.

While Trump’s recent statements on cannabis suggest a shift toward reform, his administration’s past actions reflect a more stringent approach. Time will tell how the second Trump administration will handle cannabis. In the 2024 election, Republicans reclaimed a majority in the Senate, and while the political makeup of the House is still to be determined, chances are it will most likely be controlled by Republicans. As any president’s ability to unilaterally change federal marijuana laws is limited and favorable judicial intervention is unlikely, it is up to congress to launch substantial cannabis reform which under the anticipated makeup of congress is more unlikely to happen.

Higher Taxes Still Remain

While the developments in the states listed above are favorable for cannabis business, it still remains to be seen whether the Federal government will respond favorably and when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.