Kelly Bullis
Thirty-eight states have legalized marijuana in some form or another and 24 of those are fully-legalized. Nevada is one of the fully-legalized states.
The legitimate, tax-paying businesses that have sprung up have been hamstrung by federal law. Basically, marijuana has been classified as a Schedule I drug. That means you do not get to deduct all related business expenses, just the direct cost of goods sold. So, if you have a marijuana dispensary in Nevada, you pay rent, payroll, insurance, utilities, repairs, office supplies, bank fees, travel and auto costs, advertising, legal and accounting fees, internet and computer costs, telephone, etc. None of those legitimate expenses are deductible against your taxable income on your U.S. tax return. The only cost you can deduct is what you paid your supplier for the marijuana.
Did you know that before marijuana was legalized in Nevada, anybody engaging in that business was still required to report their income, exactly the way they do now when it is legalized. It all goes back to that Schedule I drug classification. Now, before Nevada legalized marijuana, how many folks do you think voluntarily reported their then-illegal activity on an income tax return? The tax laws were in place to further punish illegal drug activities. Once they were caught, the IRS would create a tax return on their behalf and use the computed tax, interest and penalties to further reduce their then ill-gotten wealth and transfer it to the U.S. government. Not allowing legitimate business expenses was a way to make the computed tax higher.
Now, the U.S. government is benefiting from a huge windfall of legitimate marijuana businesses paying a lot of tax. (Estimated $1.8 billion in 2022, and now climbing rapidly.)
There has been a growing cry to make these now legitimate and tax-paying businesses able to thrive so they can pay even more taxes. Congress can make marijuana legal, which is not going to happen for a while, but the U.S. government can do a little sleight of hand, accomplishing the same thing without actually, officially legalizing it. Move marijuana from the current Schedule I drug classification to Schedule III drug classification. Schedule III drug activities can deduct related business activities against taxable income.
Well, in May of this year, the Department of Justice issued proposed rules to reclassify marijuana from Schedule I to Schedule III under the Controlled Substances Act. Here’s the catch. Until these proposed rules are made final, marijuana remails a Schedule I drug and thus all related business expenses remain non-deductible. Most experts are currently saying that once these changes take place, only expenses paid from that date forward would be deductible.
Have you heard? Proverbs 25:15a says, “With patience a ruler may be persuaded…”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.