This article was originally published on the Marijuana Patients Organization site on January 7, 2015.
With the Congress and Department of Justice backing away from active enforcement in medical cannabis States, the more immediate federal problem for cannabis farmers is the tax law. There is still a collective mania to hide income from this type of activity. The realities of continuous farming is that there is usually substantial income, it is more frequently becoming the primary source of income, and the need to file a tax return becomes more pressing. When deciding whether to file or not to file, consider these 5 things:
Revenue
The IRS is really interested in businesses that derive most of their income in cash. The cultivation of cannabis presents difficult record-keeping requirements because the sale of cannabis is strictly a cash business and banks have largely eliminated the ability of cannabis cultivators to maintain accounts. A consistent record of sales (including cannabis given away or bartered) should be used. Consistency of revenue records should also match your growing cycle.
Expenses
When preparing your return as a cannabis cultivator your cost of goods sold are considered deductible expenses. Cannabis cultivators are in the best position to take advantage of this because the costs of cultivation are cost of goods sold. Other expenses, which are classified as “ordinary and necessary”, are considered nondeductible under tax law, including your selling expenses. Be sure you understand which expenses are deductible as cost of goods sold and which are nondeductible.
Labor
A lot of cultivators are “helping a buddy out” or bartering for trimming services, but once you reach that magical threshold of $600 or equivalent compensation in trade to an individual the rules for deducting labor change drastically. If you want to claim labor cost on your return, you need to obtain W-9’s from your laborers with the express understanding that they may receive a 1099-MISC at the end of the year. If labor costs are more long-term and consistent, farmers should consider a formal payroll.
Facilities and Utilities
The Home Office deduction is intended for a home office. It becomes difficult when your home office encompasses a substantial portion of the square footage of your home. That doesn’t mean that you can’t deduct the portion of your home that you are using for cultivation. It takes a bit of planning when a large portion of a home is converted to a business whether the business is legal or illegal or the home is rented or owned. The home office deduction also wants to allocate expenses based on square footage. This method of allocation does not work with utility expenses.
Advice from friends and chatrooms
The US Tax system is considered a voluntary tax system especially when it addresses self-employed taxpayers. That means that you are making certain representations to the government about your income on your tax return. The decision to file or not to file; to claim everything or claim some is personal decision. Be wary of any advice especially if it comes from a source that advocates not filing taxes. Tax information for cannabis farmers on the internet is sketchy and is most commonly found in chat rooms and bulletin boards. Treat any information you receive on the internet skeptically and try to verify it independently from an offline source.
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