Risks Facing The Cannabis Industry

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Banks won’t touch you, IRS just wants to tax you and the Feds want to close you down – despite California legalizing marijuana, these are the risks marijuana businesses face every day.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics. However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

When consulting with people looking to go into the cannabis business or people who are already into this industry, there are three risks that everyone is most concerned about, namely:

1. Risk of Being Shut Down And Assets Seized By Your Local Federal District Attorney

2. Risk Of Losing All Bank Privileges

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

Risk of Being Shut Down And Assets Seized By Your Local Federal District Attorney

On January 4, 2018 Attorney General Jeff Sessions rescinded what was known as the “Cole Memo”.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that the Cole Memo has be rescinded, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws. While State law and public acceptance of marijuana usage may temper federal prosecutors’ aggressiveness, this risk of seizure and shutdown is still real. Criminal prosecution is also possible so it is important to have qualified legal counsel lined-up and available to intervene.

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.

Of the three big risks, by far this is the one posing the greatest challenge as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.

What Should You Do?

Considering this risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) 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.

Crypto-currency / Bitcoin – Is this the 21st century answer to hiding assets in Swiss bank accounts? 

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The IRS thinks this is the case! That is why the IRS has stepped up its investigation efforts to uncover non-compliant taxpayers just like the IRS successfully did in its investigation of the Swiss banks leading Congress to enact the Foreign Account Tax Compliance Act (“FATCA”).  FATCA forces foreign banks to disclose information on U.S. account holders which the IRS receives and matches the information reported by U.S. taxpayers.  No longer can taxpayers avoid reporting income on their foreign bank accounts.  No longer can taxpayers avoid disclosing their foreign bank accounts.

But with Bitcoin and other crypto-currencies, there is no such third party reporting.  Digital exchanges are not broker-regulated by the IRS. Digital exchanges are not obligated to issue a 1099 form, nor are they obligated to report to the IRS calculate gains or cost basis for the trader – but that could be changing sooner than you think!

IRS Investigative Action

Given the ability for taxpayers to engage in bitcoin transactions without proper tax reporting, the IRS though has stepped up its investigation efforts to uncover non-compliant taxpayers.

A John Doe Summons issued by IRS was ruled enforceable by U.S. Magistrate Judge Jacqueline Scott Corley in November 2017 (United States v. Coinbase, Inc., United States District Court, Northern District Of California, Case No.17-cv-01431).  Coinbase located in San Francisco is the largest cryptocurrency exchange in the United States.  Under the order, Coinbase will be required to turn over the names, addresses and tax identification numbers on 14,355 account holders. The Court has ordered Coinbase to produce the following customer information: (1) taxpayer ID number, (2) name, (3) birth date, (4) address, (5) records of account activity, including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and (6) all periodic statements of account or invoices (or the equivalent).

Now while this net may not pick up taxpayers whose accounts have less than $20,000 in any one transaction type (buy, sell, send, or receive) in any one year from 2013 to 2015, it should be clear that this is the first step for the IRS to crush non-compliance for all taxpayers involved with cryptocurrency just like the IRS was successful in battling taxpayers having undisclosed foreign bank accounts.

Penalties For Filing A False Income Tax Return Or Under-reporting Income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

What Should You Do?

The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.

With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns. 

And now that like-exchange treatment is prohibited on non-real estate transactions that occur after 2017, now is the ideal time to be proactive and come forward with voluntary disclosure to lock in your deferred gains through 2017, eliminate your risk for criminal prosecution, and minimize your civil penalties.  Don’t delay because once the IRS has targeted you for investigation – even it’s is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Jose and offices elsewhere in California get you qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability.

Honey I Shrunk The Bill – How Do You Make Valentine’s Day Candy Deductible?

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How Some California Localities Are Putting Cannabis Businesses Out Of Business.

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Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. In 2000, 70% of Americans believed marijuana should be illegal. Attitudes have since dramatically changed with a complete flip as a 2017 Yahoo News/Marist Poll survey showed that 83% support legalization.

Key State Of California Legal Developments

California was the first state in the country to legalize medical marijuana in 1996. Over the following two decades, a thriving medical marijuana industry became firmly rooted in the state despite frequent overhauls to California’s legal and regulatory framework for medical marijuana. State lawmakers addressed the confusion in the 2016 Medical Cannabis Safety and Regulation Act, an expansive piece of legislation that overhauled California’s licensing processes and regulations for patients, dispensaries, growers, manufacturers, and transporters of medical cannabis. Then on November 8, 2016, California voters passed Proposition 64, or the Adult Use of Marijuana Act (AUMA) which now starting January 1, 2018 makes it legal to engage in the recreational marijuana business.

Local Enabling Legislation Still Required

Despite this expansive mandate by the State Of California, legally going into the marijuana business still requires local enabling legislation which through county/city zoning and public safety laws permits local governments to make it easy or hard for marijuana businesses to operate in their areas. Many California counties and cities have yet to enact these local laws and for those who have, many have been issued on a temporary basis.

Two years ago, the Calaveras County Board of Supervisors saw marijuana farming as an answer to the agriculture industry devastated by the massive wildfires that occurred in the Sierra foothills. The Board Of Supervisors passed laws to encourage marijuana growers to relocate to that county. But that now all appears to have changed as a new Board Of Supervisors has voted to ban commercial cannabis cultivation. This decision that will affect about 200 permitted growers and others that have permits pending with the county.

Calaveras County is not the only county government in the Sacramento Area now banning cannabis business but so are Placer County and El Dorado County. Such a move will likely prompt lawsuits but most businesses will likely move to other counties like Sacramento County and Yolo County where cannabis commercial cultivation is still legal.

But The Feds Can Still Close You Down

Marijuana though is still illegal under Federal law. The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that as of January 4, 2018 Attorney General Jeff Sessions rescinded the Cole Memo, federal prosecutors in cannabis legal states including California will now be free to decide how aggressively they wish to enforce federal marijuana laws.

What Should You Do?

Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and other California locations. We can come up with solutions and strategies to these challenges and protect you and your business to maximize your net profits.

Warning: State Department May Deny Passport Renewals And Applications If You Owe The IRS

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Taxpayers who are seriously behind on their taxes to the IRS are putting their passports in jeopardy!

Fixing America’s Surface Transportation Act

Under the Fixing America’s Surface Transportation Act (“FAST Act”), signed into law in December 2015, the IRS is required to notify the State Department of taxpayers the IRS has certified as owing a seriously delinquent tax debt. See Notice 2018-1. The FAST Act also requires the State Department to deny their passport application or deny renewal of their passport. In some cases, the State Department may revoke their passport.

Which Taxpayers Are Impacted By The FAST Act?

Taxpayers affected by this law are those with a “seriously delinquent tax debt”.  A taxpayer with a “seriously delinquent tax debt” is generally someone who owes the IRS more than $51,000.00 in back taxes, penalties and interest for which the IRS has filed a Notice of Federal Tax Lien and the period to challenge it has expired or the IRS has issued a levy. The IRS announced that it is implementing this provision in the law staring January 2018.

How Can Taxpayers Avoid Notification To The State Department?

There are several ways taxpayers can avoid having the IRS notify the State Department of their seriously delinquent tax debt. They include the following:

  • Paying the tax debt in full
  • Paying the tax debt timely under an approved installment agreement,
  • Paying the tax debt timely under an accepted offer in compromise,
  • Paying the tax debt timely under the terms of a settlement agreement with the Department of Justice,
  • Having requested or have a pending collection due process appeal with a levy, or
  • Having collection suspended because a taxpayer has made an innocent spouse election or requested innocent spouse relief.

Taxpayers Not At Risk For Loosing Passport Privileges.

A passport will not be at risk under this program for any taxpayer: 

  • Who is in bankruptcy,
  • Who is identified by the IRS as a victim of tax-related identity theft,
  • Whose account the IRS has determined is currently not collectible due to hardship,
  • Who is located within a federally declared disaster area,
  • Who has a request pending with the IRS for an installment agreement,
  • Who has a pending offer in compromise with the IRS, or
  • Who has an IRS accepted adjustment that will satisfy the debt in full.

Also for taxpayers serving in a combat zone who owe a seriously delinquent tax debt, the IRS postpones notifying the State Department and the individual’s passport is not subject to denial during this time.

Timeframe And Process To Get IRS Clearance For Passport Renewal Or Application

When a taxpayer applies for a passport (either original issuance or renewal), the State Department, in general, will provide the applicant with 90 days to resolve their tax delinquency with the IRS before denying the application. If a taxpayer needs their passport to travel within those 90 days, the taxpayer must contact the IRS and resolve the matter within 45 days from the date of application so that the IRS has adequate time to notify the State Department.

The remedy for a taxpayer who believes that a certification to the State Department of a tax delinquency is erroneous or that the IRS incorrectly failed to reverse a certification because the tax debt is either fully satisfied or ceases to be a “seriously delinquent tax debt”, is to file an action in Federal District Court. However, taxpayers in this situation may be able to reach resolution within the IRS with the assistance of qualified tax counsel and thus avoid the delay and expense of bringing an action in Federal District Court.

What Should You Do?

If you have outstanding liabilities with the IRS or any State Tax Agency, protect yourself and preserve your right to travel 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), Walnut Creek and elsewhere in California are highly skilled in handling tax matters and can effectively represent you 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.

Thinking About Using Medical Marijuana While On Federal Supervised Release Or While Serving Federal Probation?

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Medical marijuana is now legal in 29 states (including California) plus the District Of Columbia.  However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

Federal Law

21 U.S.C. § 812 known as the Federal Controlled Substances Act (“CSA”) classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically.

Probation vs. Supervised Release

Probation and Supervised Release are imposed at sentencing. Probation is imposed as a substitute for imprisonment. Supervised Release is imposed in addition to imprisonment. At the Federal level, Probation and Supervised Release are both administered by the U.S. Probation and Pretrial Services System. Federal Probation has existed since 1909. Federal Supervised Release has only existed since 1987, when it replaced federal parole as a means for imposing supervision on individuals that have been released from jail.

The U.S. Probation and Pretrial Services Office interviews and monitors all individuals from pre-sentencing until their period of Probation or Supervised Release is completed. At the pre-sentencing interview the individual will be questioned on what prescriptions or other medication he or she is taking and reminds the individual that the use of illegal drugs and medical marijuana will violate the terms of his or her freedom from incarceration. It does not matter that the state where the individual resides has legalized medical marijuana and the individual is following state law in obtaining and using the marijuana. On January 4, 2018, Attorney General Jeff Sessions announced that in the course of federal prosecutions of people who violate federal law that outlaws marijuana, he will leave it up to the local Federal prosecutors as to what cases should be prosecuted. Likewise, the U.S. Probation and Pretrial Services Offices are following the same stance where they warn individuals that using medical marijuana will violate the terms of their release and they will be reported to the Federal District Court.

What This Means For Individuals Under Probation Or Supervised Release

Unfortunately because medical marijuana is illegal under federal law, medical marijuana patients who are on federal Supervised Release or Federal Probation do not have the right to use their medicine. Violations of conditions of probation or supervised release can result in said revocations being reported to the court and a revocation hearing being held resulting in an individual being put back under custody or other sanctions imposed.

What Should You Do?

Given the greater disparity in treatment between the Federal and California governments you need to protect yourself and preserve your freedom if you have been using marijuana and you are on probation or supervised release.  Be proactive and engage an experienced attorney-CPA in your area.  Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario) and other California locations protect you.

Adding To The Turmoil For The Marijuana Industry – Federal District Attorney For Southern District Of California Endorses Attorney General Sessions’ Revocation Of The Cole Memo

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On January 4, 2018, U.S. Attorney General Jeff Sessions announced the revocation of what is known in the cannabis industry as the “Cole Memo”.

It is surprising that the Trump Administration known for its pro-business stance, allowed for such an anti-business decision to be made by Attorney General Sessions.  Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia.  However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

United States Attorney’s Office for the Southern District of California Is The First Office In California To Officially Announce It Will Not Follow The Cole Memo

There are four federal districts in California with each district headed by a chief federal prosecutor.  The office of the Federal Southern District Of California which covers San Diego is the only one so far issuing an official statement.  So while federal prosecutors in States like Colorado stated that they won’t change their approach to prosecuting marijuana crimes, federal prosecutor, Adam Braverman, announced that the office of the Federal Southern District Of California is committed to enforcing the laws enacted by Congress, which treats marijuana as an illegal controlled substance.  He goes on in his written statement that “The Department of Justice is committed to reducing violent crime and enforcing the laws as enacted by Congress. The cultivation, distribution, and possession of marijuana has long been and remains a violation of federal law. We will continue to utilize long-established prosecutorial priorities to carry out our mission to combat violent crime, disrupt and dismantle transnational criminal organizations, and stem the rising tide of the drug crisis.”

What Is The Cole Memo?

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal. The DOJ told its prosecutors that prosecuting medical marijuana cases in states where is has been legalized would no longer be a priority.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

What This Means For Marijuana Businesses

Hopefully the federal prosecutors in the Southern District of California will change its stance and follow the same position as other federal prosecutors like in the State of Colorado in reaffirming a commitment to prioritizing violent and other serious federal crimes.  Look to us for future updates on this.

What Should You Do?

Given the greater disparity in treatment between the Federal and California governments you need to protect yourself and your marijuana business from all challenges created by the Federal government.  Be proactive and engage an experienced attorney-CPA in your area.  Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and other California locations protect you and maximize your net profits.

Updated 2018 Withholding Tables Now Available - Taxpayers Could See Paycheck Changes by February

Updated 2018 Withholding Tables Now Available – Taxpayers Could See Paycheck Changes by February

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The Woes Of The Cannabis Industry

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Banks won’t touch you, IRS just wants to tax you and the Feds want to close you down – despite California legalizing marijuana, these are the challenges marijuana businesses face everyday.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics. However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.  

Banks Won’t Touch You

While states are opening their markets to marijuana, the illegality under Federal law still restricts cannabis businesses access to banking channels.  However, guidance issued by the Financial Crimes Enforcement Network (“FinCEN”) on February 14, 2014 (FIN-2014-G001) clarified 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. Whilethis FinCEN guidance (which has yet to be revoked or changed)should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses, banks being conservative by nature are still overwhelmingly reluctant to provide banking services to this industry.

IRS Just Wants To Tax You

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.

Feds Want To Close You Down

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that as of January 4, 2018 Attorney General Jeff Sessions rescinded the Cole Memo, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws.

What Should You Do?

Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and other California locations.  We can come up with solutions and strategies to these challenges and protect you and your business to maximize your net profits.