Tax tips (and other things)
38 states have legalized marijuana in some form or another, 24 of which are fully legalized. Nevada is one of the states where marijuana is fully legalized.
The legal, tax-paying businesses that have mushroomed are hampered by federal law. Marijuana has basically been classified as a Schedule I drug. This means you can’t deduct all of the business expenses associated with it, only the direct cost of the goods sold. So if you operate a marijuana dispensary in Nevada, you’ll pay rent, payroll, insurance, utilities, repairs, office supplies, bank fees, travel and car expenses, advertising, legal and accounting costs, internet and computer costs, telephone, etc. None of these legal expenses are deductible from your taxable income on your U.S. tax return. The only costs you can deduct are what you paid your supplier for the marijuana.
Did you know that before marijuana was legalized in Nevada, anyone who was in the business had to report their income, just like today when it’s legal? It all goes back to the drug’s Schedule I classification. Before marijuana was legalized in Nevada, how many people do you think voluntarily reported their then-illegal activities on an income tax return? Tax laws were in place to further penalize illegal drug activity. Once they were caught, the IRS would prepare a tax return on their behalf and use the taxes, interest, and penalties calculated to further reduce their then-ill-gotten wealth and remit it to the U.S. government. Disregarding legitimate business expenses was one way to make the taxes calculated higher.
Now the U.S. government is benefiting from a huge windfall from legal marijuana companies that pay a lot of taxes. (An estimated $1.8 billion in 2022, and rising sharply.)
More and more voices are demanding that these now legal and tax-paying businesses continue to thrive so they can pay even more taxes. Congress can legalize marijuana, but that will take a while, but the U.S. government can use a little sleight of hand to accomplish the same thing without actually officially legalizing it. One could move marijuana from its current classification as a Schedule I drug to Schedule III. Activities related to Schedule III drugs can deduct related business activities from taxable income.
Well, in May of this year, the Justice Department issued proposed rules to reclassify marijuana from Schedule I to Schedule III under the Narcotics Act. Here’s the catch: Until these proposed rules are finalized, marijuana will remain a Schedule I drug and any business expenses related to it will therefore remain non-deductible. Most experts currently say that once these changes take effect, only expenses paid after that date will be deductible.
Have you heard? Proverbs 25:15a says, “By patience a ruler can be persuaded…”
Kelly Bullis is a CPA in Carson City. You can reach him at 775-882-4459. He is online at BullisAndCo.com. He is also on Facebook.
