ACT Resources News Update – September 2020
Fall is in the air after a long and strange summer, but hopefully the third quarter of the year brings positive things for you, your business, and the cannabis industry as a whole. In this month’s news update, we’ll look at a report from the Treasury Inspector General for Tax Administration that suggests increased Internal Revenue Service (IRS) audits related to Section 280E could be on the way for cannabis businesses. Additionally, the number of states with cannabis legalization on the ballot in November is down to five, with a sixth state on the fence. We’ll also look at employment trends in the cannabis industry and the first ever vote in Congress on cannabis legalization.
Final Tax Deadline Fast Approaching
The extended 2020 tax season is quickly winding down. The final tax deadline is looming for partnerships and S Corporations that filed for an extension in March. The deadline to submit tax return documentation for these entities is September 15. Failure to meet this deadline could result in late filing penalties every month until the documentation is filed.
Additionally, individuals and C Corporations that submitted an estimated payment in July and requested an extension have until October 15 to file all required documentation.
Treasury Department Report Suggests More Cannabis Industry Tax Audits
The U.S. Treasury Inspector General for Tax Administration released a 53-page report last March entitled “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance” which calls for increased Section 280E tax audits of cannabis businesses by the IRS.
“Businesses in [the cannabis] industry have limited banking access and are subject to Internal Revenue Code (I.R.C.) Section 280E, which prohibits the deduction of expenses incurred in trafficking Schedule I controlled substances” the report reads.”The IRS risks diminished taxpayer compliance when marijuana
businesses fail to report all income as required under I.R.C Section 61, regardless of source, and deduct expenses not allowed under I.R.C. Section 280E.”
The report suggests the IRS might have missed out on as much as $242.6 million since FY2016, and that 59% of cannabis businesses likely included deductions not permitted under Section 280E in their tax filings. It also recommends the IRS use state licensing to identify cannabis businesses and scrutinize their tax filings, so compliance is more critical now than ever before.
This report sends a clear signal that the U.S. Treasury Department and IRS are putting the cannabis industry under a microscope as it expands. Expect stepped up tax audits, especially regarding Section 280E deductions. In light of this report, it is more important than ever to work with an experienced accounting partner.
Five States Put Cannabis Legalization on Ballot; Nebraska Referendum in Court
The number of states with cannabis legalization on the ballot in November is down to five, after some efforts met insurmountable obstacles associated with the COVID-19 pandemic. Nebraska might join these five states to make the total six, but petitioners are currently awaiting a court decision regarding the referendum, which is expected September 11. The five states with legalization measures up for a vote on Election Day are:
- Arizona: Voters in Arizona have the chance to approve the legalization of adult-use cannabis in a state where the market is projected to be worth $750 million annually.
- Mississippi: Mississippi voters will have to medical cannabis legalization initiatives to choose from, one put forward by petitioners and the other put forward by state legislators.
- Montana: Montana is already home to a multimillion-dollar medical cannabis industry, but this year voters could approve an expansion into the adult-use space as well.
- New Jersey: The Garden State has been trying to legalize adult-use cannabis unsuccessfully for some time. This year, voters will have the chance to approve the measure at the ballot box in a state where the industry could eclipse $1.5 billion in value annually.
- South Dakota: South Dakota voters could make history by becoming the first state to legalize both medical cannabis and adult-use cannabis in one fell swoop.
Even as the COVID-19 pandemic has upended businesses nationwide, the cannabis industry is still poised to break into new markets. For many, this could be an opportunity to launch a new business or grow an existing business. We eagerly await Election Day for the results of these ballot referendums.
Cannabis Industry Employment on the Rise Despite COVID-19
Even through the pandemic, the cannabis industry has increased sales and hiring. Many states deemed cannabis businesses and the ancillary companies that support them as essential services, preventing forced closures during the height of the pandemic. And despite a general slump in consumer demand across most industries, the cannabis industry is on track to finish 2020 with $15 billion in sales and 300,000 full time jobs nationwide, a 40% and 50% increase year over year, respectively.
As more states consider legalizing medical and adult use cannabis, the growth opportunity is clearly immense. Already, with just only 33 states with legal medical marijuana programs and 11 with legal adult use cannabis, the industry employs as many people as computer programming, another high growth space that doesn’t face the same legal restrictions.
First Ever Congressional Vote on Cannabis Legalization in House of Representatives
In a historic move following a year of Congressional cannabis reform – but not legalization – efforts, the U.S. House of Representatives will vote on the Marijuana Opportunity Reinvestment and Expungement (MORE) Act proposed by Rep. Jerry Nadler (D-NY). The measure would remove cannabis from the Controlled Substances Act and expunge some cannabis-related criminal convictions. However, it is unlikely to be brought up for a vote in the U.S. Senate.
Regardless of the bill’s chances of passage in both chambers and, ultimately, a presidential signature, the vote represents the high watermark of pro-cannabis legislation on Capitol Hill. Whether the measure passes or not, it is a clear signal that the tide of opinion amongst federal elected officials is changing; even a few years ago, it was unthinkable that the federal government would consider voting on the legalization of cannabis, and yet in one of the most politically divisive years in recent history just that is happening.
ACT Resources is Your Cannabis Accounting Partner
Though times have been tough for many this year, the cannabis industry has managed to stabilize and continue its growth. This is evidenced by growing employment, as well as the legalization movements momentum in new states in the upcoming election. And, while it is largely symbolic, the first ever vote on cannabis legalization in the House of Representatives is an historic moment that signals just how weak the foundation of prohibition era policies has become.
As the cannabis industry grows and changes, it’s critical your business has a financial partner that understands the labyrinthian tax implications facing the cannabis industry. ACT Resources brings the expertise you need to the table and can explain the nuances to you in plain English. If you’re in need of partners who won’t keep you in the dark, don’t wait – ACT today.