By Curran Daly
Proposition 64 legalized the recreational use of Marijuana by people 21 years of age or older. The passing of Prop 64 also created new taxes to help generate state tax increases. These taxes are meant to make Marijuana profitable for the state.
Humboldt County is home to illegal marijuana grow operations. With the legalization of Marijuana it is expected that some illegal growers will begin to make the transition to legal operations.
Joshua Zender, assistant professor in the School of Business at Humboldt State, is an active certified public accountant in California. Professor Zender warns illegal growers who attempt to go legal with their operation of the problems they will face when filing taxes.
“Regardless of whether your business is licensed, you still need to disclose all sources of income to the IRS,” Zender said. “Including illegal sources of revenue from CSA – Class I banned substances like marijuana.”
Failure to comply with tax regulations can put grow operations in serious danger of incurring tax penalties.
“I highly doubt that the State of California will attempt to recapture previously under-reported monies,” Zender said. “They want to encourage the industry to come clean, by offering incentives to accurately report in current and future periods.”
While the state may not be looking to recoup some of the past money, that does not stop the IRS from looking for what it believes it is owed. A grower that previously under reported could be subject to an audit in which case the IRS could assess the additional tax, plus penalties and interest.
Growers hoping to start going legal will be faced with declaring their income accurately, something they may not have been doing while operating outside the law. To avoid these types of issues it is important that marijuana dispensaries and growers need to become familiar with Internal Revenue Code Section 280E which states, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business consists of trafficking in controlled substances which is prohibited by federal law or the law of any state in which such trade or business is conducted.”
The rules and regulations can be very complex and confusing once you begin to delve into them. Finding a qualified tax attorney or Certified Public Accountant would be highly beneficial in trying to navigate the uncertain tax ground that exists surrounding marijuana businesses.
“Individuals who make a good faith effort to comply are unlikely to be severely penalized,” Professor Zender said. “However, people who elect to disregard these requirements are likely to pay a price.”