With the constantly changing and evolving legal cannabis industry in the West, a number of longstanding institutions—and traditions—are being challenged. As we continue to venture ahead into a new era of reform, despite the continued federal prohibition of cannabis, entities like the Internal Revenue Service (IRS) are taking notice.
Specifically, the IRS recently issued a new memo clarifying the rules surrounding how cannabis businesses report large cash payments between one another. In an IRS memo, the agency states that these transactions should not automatically be considered “suspicious” solely because of the current prohibited federal status of cannabis.
The IRS published the memo in response to a request for guidance on how cannabis businesses should approach Form 8300, a document companies must complete when receiving a cash payment of $10,000 or more. The guidance is dated January 22 but was only made public earlier this month.
The memo also nods to a broader range of compliance considerations, like best practices to identify the type of business receiving cash payments, namely that companies can disclose their relation to “marijuana” but that other categories, like general agriculture, may also “be more fitting.”
According to Charles Hall, special counsel with the IRS, the memo was meant to provide guidance on these and related issues via a Q&A format.
Hall also noted that the IRS is working on additional guidance surrounding questions related to “cash couriers/armored cars who transport cash between growers/manufacturers and dispensaries/sellers.”
The IRS specifically notes that businesses should not check off a box reserved for suspicious cash transactions solely because businesses are related to cannabis, despite the fact that the federal Financial Crimes Enforcement Network (FinCEN) has long standing guidance pushing financial institutions to file suspicious activity reports (SARs) for cannabis business clients.
The memo poses the question, “Is it reasonable for a legalized substance business to check the suspicious activity box simply because of the type of product they deal with?”
The IRS notes that, when the suspicious activity box is “purely done defensively,” it is an “abuse of the use of that box” underscoring that solely checking off a transaction as suspicious because of its relation to the legal cannabis industry is “not an appropriate use” and could result in penalties for inaccurate forms, dependant on the facts and circumstances of the case.
The guidance also reviews a number of hypothetical scenarios related to Form 8300 and cannabis businesses.
While the memo specifies that it “may not be used or cited as precedent,” nor does it represent any specific policy change, it still reflects the changing nature of federal entities grappling with the growing cannabis industry and its widening scope in the U.S.
A recent analysis confirmed that 74% of Americans live in a state were cannabis is legal for medical or recreational use, 54% of Americans live in a state with legal recreational cannabis and 79% of Americans live in a county with at least one cannabis dispensary.
After the guidance was released, Rep. Earl Blumenauer (D-OR), founding co-chair of the Congressional Cannabis Caucus, told Marijuana Moment that the IRS memo displayed “leadership we need from federal agencies,” calling the notice a “small but consequential and common-sense step forward” for how the U.S. tax system approaches state-legal cannabis businesses.
It also reflects the continued strain between legal cannabis markets and federal regulations, in that businesses are still required to report and pay taxes on their income even though cannabis remains a federally controlled substance.
Of course, there are still restrictions surrounding these businesses as it pertains to the current federal prohibition of cannabis. Namely, cannabis businesses cannot claim federal tax deductions from their income—though that could soon change if the Drug Enforcement Administration (DEA) decides to move cannabis from Schedule I to Schedule III on the Controlled Substances Act (CSA).
The potential rescheduling of cannabis from Schedule I to Schedule III has been ongoing for months now, and while it’s expected the DEA will reach a decision soon, it’s still unclear as to exactly when the announcement will be made and which direction the administration will go.
While rescheduling cannabis would not legalize it, and it would remain a federally controlled substance, it would remove research barriers and allow cannabis businesses licensed by the state to take federal tax deductions.
