Aug 9, 20222 min read

How does the taxation actually work?

Let's start with the current status: the growth and sale of marijuana is still illegal at the federal level.

However, the IRS has made it possible to still for marijuana operations to exist but hence have their share of it. From data collected in 2021, 34 states (including Puerto Rico) have implemented medical marijuana programs, ten states (including the District of Columbia) allow recreational marijuana sales, and the remaining states still hold marijuana growing and sales illegal.

Now, how can it be possible that there can be such a difference between what is legal and illegal? Well, it is & it isn't. It is where it gets tricky. So on the federal level, it is illegal, but every state has its own regulations. Yet, since the IRS is a federal function, they tax income from any source derived without attention to the legality. Therefore, sales of marijuana are taxable at the national level. In addition, the IRS is well aware that many marijuana businesses conduct transactions in the case. Therefore, there is an IRS Taxpayer Assistance Center available where payments over $10.000 must be reported by filing Form 8300, Report of Cash Payments over $10.000 received in a trade or business.

We often hear that marijuana businesses have to pay up to seventy percent of their income in taxes, no matter if the seller is in a state where marijuana is legal. However, it does not matter if permitted or not in the state you are currently standing in.

The same tax deductions or credits for any amount paid or incurred in carrying illegal scheduled I or II controlled substances apply.

So the IRS has said they can take expense deductions that relate directly to the product (but sometimes also indirectly). The only thing is that it has to deal with the production of the product. So let's look a little deeper into how the COGS is calculated: The basic definition of COGS (cost of goods sold) is the beginning inventory and then add the purchases/growing costs/freight & storage costs = which gives the total of goods available. Then subtract the ending inventory = that is the cost of goods sold.

So let's draw up an example. You purchase the marijuana from a grower that falls under the "purchases/growing costs." However, if you have another building where you have to keep your inventory (the marijuana you're selling) does not fall under section E280 costs. This means the rent for the building is not part of trafficking a controlled substance and can be written off.