Cannabis

[strongsilence]

I'm unwise to cannabis. (Not like that silly!)  Are there resources or guides that you would feel are essential for understanding and learn tax issues for cannabis clients in California?

This client makes cannabis-derived consumer products but does not sell them retail or wholesale yet.

[Terry53029]

See this link:

https://www.irs.gov/businesses/small-businesses-self-employed/cannabis-industry. 

[IRonMaN]

To further insulate yourself from the topic, I think you were supposed to say that you were asking for a friend 😁

[BobKamman]

An interesting news article covers most of what you need to know on the federal level.  One IRS executive noted, 

"This kind of information is also available on the IRS website, the official said, though he noted for now people need to search “marijuana,” rather than “cannabis,” to find what they need. That’s changing, Harris said, “because I really feel like a lot of the folks that are in the industry prefer to use the word ‘cannabis’ instead of ‘marijuana.'”

https://www.marijuanamoment.net/irs-official-gives-marijuana-businesses-advice-on-tax-compliance/

The two most notable things about this business are, to me:  (1) ordinary and necessary business deductions are not allowed, but you still get cost of goods sold; and (2) banks won't let you open an account, so it's all cash.  (Many "dispensaries" have ATM's inside.) 

California keeps changing its rules.  They just repealed a 15% excise tax on cannabis.  That and other information here:

https://www.cdtfa.ca.gov/industry/cannabis.htm  

If your client hasn't started selling anything yet, is he just testing the products himself for now?  

[strongsilence]

Thanks.

It's all COGS and the client has a deep and rich source of financing for the product development cycle.

No taxes paid yet but I have the R&D credit in mind when taxes are paid.

"If your client hasn't started selling anything yet, is he just testing the products himself for now? "

I'm consider bartering in lieu of my fees. he he.   

[sjrcpa]

"I have the R&D credit in mind when taxes are paid."

Since the only deduction you get at the federal level is COGS, I doubt you can get R&D Credit for this business.

Or are you talking CA R&D credit?

[joshuabarksatlcs]

CA R&D Credit...  Got me to think it was the Recreation & Delusion Credit...  Yeah, it sounds like a California credit.

[strongsilence]

I don't see the connection between the COGS limit and the R&D. I'm dense at the moment. 

Because of the limit to COGS, there most likely be taxable income. Since there will be income then there will be tax. Since there is tax then there will be tax to recover (through the R&D credit.) This is basic but I don't see that it is wrong.

[TaxGuyBill]

Maybe I'm overly cautious, but I don't think I've ever seen CPE classes mention this:

Cannabis is still illegal at the Federal level.  If the business owner is comfortable breaking Federal laws, what makes you think they will be honest and forthcoming with complying with tax laws?

Personally, I would want a much higher degree of documentation of income and expenses for this type of business than I ask for with other businesses.

[BobKamman]

And cohabitation is still illegal in Michigan, right?  How would you feel about doing a return for former Speaker of the House John Boehner?  He's supporting the legalization movement, along with other notable former and current politicians.  Do you do returns for gynecologists?  How about Catholic priests?  On the other hand, cleanliness is next to godliness and there's nothing illegal about coin-operated laundromats, but I would have second thoughts about taking on one of those as a client.  (Granted, many of them now operate with cards, not cash.)

[George4Tacks]

This is not current, but somewhere to start. https://www.caltax.com/spidellweb/public/webinars/webinar-materials/MarijuanaCPE.pdf

https://caltaxminute.com/taking-on-clients-in-the-marijuana-industry-too-risky

More recent https://www.wolterskluwer.com/en/expert-insights/california-provides-tax-credits-for-cannabis-busine...

P.S. We all have the right to refuse service to those who have tax issues we are not comfortable to work with. I knew I was comfortable in this profession when I fired my first customer and then definitely comfortable when I sent one "down the street" to find someone that could handle this return. 

[BobKamman]

I have fired my share of clients.  But I also remind myself occasionally that professionalism doesn't mean just doing the easy jobs -- it means accomplishing the difficult work.  At least we're not ER doctors.  

[strongsilence]

Very kind of you to share.  Thank you.

" I knew I was comfortable in this profession when I fired my first customer and then definitely comfortable when I sent one "down the street"

That is good to know as I get ready to fire my first soon. I can tell she is making up deductions and trying to get to a desired tax result. 

[strongsilence]

Food for thought.  My hardest job is with a man struggling with a mental diagnosis that prevents understanding and limits his communication.  WOW.  I feel like leaving him every day.  But MAN serving him is difficult.  

He has aphasia.

A comprehension and communication (reading, speaking, or writing) disorder resulting from damage or injury to the specific area in the brain.

Very common (More than 3 million cases per year in US)

Treatments can help manage condition, no known cure

Requires lab test or imaging

A lifelong condition

Common for ages 60 and older

[sjrcpa]

It was just my thought, likening deductions to credits. I do not know for sure.

[Eternalwe]

I see it’s been a while since you’ve posted, but I’d love to chime in—has anyone had recent experience with state-level deductions for cannabis businesses? I’ve seen some states allowing certain expenses despite 280E at the federal level, and I’m curious how others are tracking those adjustments. Are you filing separate sets of books or using workarounds to stay compliant while still optimizing deductions?

[Arsenamail]

I’ve seen others split things out clearly between cost of goods sold and non-deductible expenses, then back it up with detailed records in case the IRS ever questions it.