Federal Taxes

[Lancy]

How are federal taxes going to be treated for the "chosen"!?  few that are going to be able to grow 500-1500 plants, if they can't write off expenses?

[shishka]

As of now you can deduct direct costs of producing agricultural goods. Equipment, rent, nutrients, utilities and such. Where you get screwed is everywhere else a "normal" business can take deductions, phone, car, gas, computer, employees ect...

[+Malamute]

The regulation at question  is Revenue Code Section 280E. It prohibits DTOs from taking deductions allowed to all other businesses in the United States, including expenses for labor, rent, utilities, insurance, professional fees, etc. The IRS application of Section 280E to medical cannabis businesses can result in a federal tax rate of 60 to 90 percent.

 

 

There will be a Federal ruling coming down on this any month now.  Illegal drugs = no deductions.

 

Marijuana is illegal federally.

[+Malamute]

The root of the tax problem dates back to a 1961 Supreme Court ruling that says even illicit income is taxable. That allowed a Minnesota man busted for selling weed, cocaine, and amphetamines to successfully claim in 1974 that he could write off the cost of his packaging materials, scale, and other expenses. Congress struck back in 1982 by enacting 280E, which states “no deduction or credit shall be allowed” for any business that “consists of trafficking in controlled substances.”

[Restorium2]

As of now you can deduct direct costs of producing agricultural goods. Equipment, rent, nutrients, utilities and such. Where you get screwed is everywhere else a "normal" business can take deductions, phone, car, gas, computer, employees ect...

You can't claim it federally and the state uses your federally adjusted income tax number as a baseline. So ????????? Another hole in the business model?

[mibrains]

You can't claim it federally and the state uses your federally adjusted income tax number as a baseline. So ????????? Another hole in the business model?

 

 

you MUST claim it both federal and state.

every penny.

you can't claim any deductions but you have to claim all income from all sources...

[Restorium2]

you MUST claim it both federal and state.

every penny.

you can't claim any deductions but you have to claim all income from all sources...

What income? I don't sell to a dispensary, I help patients. You must have me mistaken for someone else.

 

Besides that: None of my patients claim what they pay for their medicine as a deduction. The government checks what is reported to them. 

[+Malamute]

Legally, any time you have any income you should report your income on your tax form.  It goes under "other income".

 

Anytime you have a garage sale, or mow someones yard or anything,... you are 'supposed' to report it as income.

 

I don't know anyone who has reported garage sale money in my life,.... but that doesn't mean you aren't supposed to.

 

Heh.

[+Malamute]

Reporting Miscellaneous Income

FS-2007-26, November 2007

While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:

• cash earned from side jobs,
• barter exchanges of goods or services,
• awards, prizes, contest winnings and
• gambling proceeds.

This fact sheet, the 18th in the Tax Gap series, will help taxpayers better understand miscellaneous income and what they are required to report as taxable on their Form 1040.

The tax gap, or the amount of taxes that go unpaid each year, results from taxpayers underreporting their taxable income. Fortunately most people want to pay their fair share of taxes and many simply need a better understanding of their obligations.

What is Taxable?

Taxpayers must report all income from any source and any country unless it is explicitly exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands.

Generally, the IRS considers all income received in the form of money, property or services to be taxable income unless the law specifically provides an exemption. This document discusses a few types of reportable income. Information on how to report other types of income can be found in Publication 525, Taxable and Nontaxable Income.

Self-Employment Income

It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.

All income earned through the taxpayer’s business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040.

Use Form 1040, Schedule C, Profit or Loss from Business, or Form 1040, Schedule C-EZ, Net Profit from Business (Sole Proprietorship) to report income and expenses. Taxpayers will also need to prepare Form 1040 Schedule SE for self-employment taxes if the net profit exceeds $400 for a year. Do not report this income on Form 1040 Line 21 as Other Income.

Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not issue a Form 1099-MISC, the income, whatever the amount, is still reportable by the taxpayer.

Fees received for babysitting, housecleaning and lawn cutting are all examples of taxable income, even if each client paid less than $600 for the year. Someone who repairs computers in his or her spare time needs to report all monies earned as self-employment income even if no one person paid more than $600 for repairs.

Bartering

Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties.

An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. Income from bartering is taxable in the year in which the taxpayer received the goods or services.

Gambling winnings

Gambling winnings are fully taxable and must be reported on Form 1040.

Gambling income includes, among other things, winnings from lotteries, raffles, horse races, poker tournaments and casinos. It includes cash winnings as well as the fair market value of prizes such as cars and trips.

Even if a W-2G is not issued, all gambling winnings must be reported as taxable income regardless of whether any portion is subject to withholding. In addition, taxpayers may be required to pay an estimated tax on the gambling winnings.

Losses may be deducted only if the taxpayer itemizes deductions and only if he or she also has gambling winnings. The losses deducted may not be more than the gambling income reported on the return.

Prizes and awards

Subject to certain exceptions, the cash value of prizes or awards won in a drawing, quiz show program, beauty contest, or other event, must be included on the tax return as taxable income.

Taxpayers must also report the fair market value of merchandise or products won as a prize or award, as taxable income.

For example, both a $500 cash prize and the fair market value of a new range won in a baking contest must be reported as other income on Form 1040, Line 21.

[+Malamute]

Btw, ,no one ever reports such income unless there is a paper trail. Heh.

[+Malamute]

But, if the 280E ruling comes down unfavourably,... a typical dispensary owner has to pay tax on the cost of purchasing wholesale cannabis as well as on what is sold. 35% tax on something you are making 50% of.

 

In Michigan, that will end up being around 75% tax and fees total, in a current legal sense.

 

But we should get a court ruling literally in the next couple of months.

[Greg Rx]

If you were doing anything other than cannabis, you would be declared a hobby and you would be barred from deducting your expenses from other income. Most caregivers could show an operating loss if ALL expenses are tracked. So it would be smart to fill out the expense section. Just keep it for the future.

[kev]

There is an IRS statute of limitations on collecting taxes.  The IRS is limited to 10 years to collect back taxes, after that, they are barred by law from continuing collection activities against you.

[LCSolutionsAccounting]

You can deduct your Cost of Goods Sold if you account for it properly under the accrual accounting method.  These are your costs of production - soil, fertilizer, lights, packaging, edible ingredients, etc.  However you need to follow true accounting methods, including depreciable lives on equipment and treating costs as part of your inventory.  There have been several IRS memos released on the subject since 2015.  Cost of Goods Sold are a deduction from Gross Receipts.  They are a return of capital - what you paid in order to grow the plants and process them to be ready for sale.  They are not considered a business expense, but rather a deduction to arrive at gross income. 

 

Having said that, you need to have a sound method for applying costs to your sold plants.  You can not just right off receipts in bulk.  You have to apply them as first capitalized to your inventory and only expense them to cost of goods sold as the plants are actually sold.  This includes carrying over any amounts attributable to plant material not yet sold.

 

Caregivers benefit the most from this, as the majority of your costs are related to the production of your plants.

 

You would treat your operation as a business and fill out Schedule C for your Federal tax return.

 

I wouldn't suggest trying to do this however unless you have already been doing so in a consistent manner.  Start fresh with 2017 in applying proper accounting methods.  

 

I have an ad in the classifieds if you need more help.