A recent U.S. Department of Treasury Inspector General report suggests that an increase in tax enforcement measures for the legal marijuana (cannabis) industry are imminent, with or without a corresponding increase in IRS guidance.

The legal cannabis industry has expanded prodigiously over the last decade and, as of 2020, a majority of states now allow the sale of cannabis for both medical and recreational uses. What was once primarily an underground enterprise is now an open, multi-billion-dollar industry, with sales expected to nearly double by 2025.

However, despite the increasing acceptance of legal cannabis at the state level, and skyrocketing sales, problems related to taxation remain. For example, while legal cannabis businesses are obligated to pay federal income taxes, cannabis itself remains a Schedule I Controlled Substance. This presents a number of issues, both with payment processing (cannabis businesses still rely heavily on cash as they generally cannot accept credit cards or rely on the traditional banking system) and taxation (a perception of underreporting and a lack of governmental guidance for full compliance). Legislative efforts aimed at ameliorating certain cannabis-related business challenges, such as the Secure and Fair Enforcement (“SAFE”) Banking Act,¹have as of yet not generated sufficient political support to become law.

In pertinent part, under Internal Revenue Code (“I.R.C”) Section 61, businesses, including those in the cannabis industry, are obligated to report all income, regardless of source or legality. Yet, I.R.C. Section 280E prohibits deductions and credits “for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances.” [Read More @ Nixon Peabody]