At last count, 23 states, plus the District of Columbia, allow medical marijuana; four states, including Colorado and Washington, allow recreational use. So pot is big business and growing all the time.
Problem: While all businesses must deposit theirelectronically, banks don’t allow pot-related businesses to open accounts, because pot is still a Schedule 1 controlled substance. This basically guarantees failure-to-deposit penalties.
Break: In interim guidance, the IRS is providing these businesses, and other businesses that can’t get bank accounts, with penalty relief.
Rocky mountain high
In 2013, the IRS levied failure-to-deposit penalties against Allgreens, LLC, a licensed medical marijuana business in Colorado because it couldn’t deposit itstaxes electronically. Allgreens requested a penalty abatement on the basis that it had reasonable cause for its failure to deposit electronically—it couldn’t obtain a bank account. The IRS denied the abatement. The company and the IRS settled this disagreement earlier this year.
No more reefer madness
The IRS’ interim guidance will remain in effect until June 9, 2016. It’s limited to businesses that cannot get bank accounts or are unable to make other arrangements for depositing their payroll and other federal taxes.
In order to receive a penalty abatement, you must show the following:
- That you made a reasonable effort to open a bank account but couldn’t
- You must include a signed statement that explains your attempts to get a bank account
- You must attach corroborating documentation (e.g., denied bank account applications, correspondence from your bank). (SBSE-04-0615-0045)
Relatedly, the IRS concluded in Chief Counsel Advice that a commercial pot business in Washington that pays the state marijuana excise tax should treat that expenditure as a reduction in the amount realized on the sale of the property, rather than as either a part of the inventoriable cost of that property or a deduction from gross income.
Although tax deductions related to illegal businesses are generally prohibited under tax code Section 280E, the Chief Counsel concluded that the Washington excise tax is neither a deduction from gross income nor a tax credit. Consequently, the Chief Counsel said that section doesn’t preclude a taxpayer from accounting for the excise tax as a reduction in the amount realized on the sale of the property. (ILM 201531016)