The recreational cannabis industry is considered a high-growth market, with the potential to grow to $66.3 billion by 2025.
However, despite the massive amount of cash pouring into the industry, operators are limited by the Cole Memorandum and federal regulations prohibiting banks from working with cannabis companies.
Lack of access to the banking system causes many problems for legal cannabis businesses – especially when it comes to paying taxes.
Federal regulations force cannabis operators to pay their taxes in cash (in most cases). There are a lot of cannabis taxes to be accounted for; the US government is estimated to have collected $4.7 billion in taxes from cannabis companies in 2017. That’s not to mention the state and local taxes cannabis operators are subject to – which can be at rates as high as 15% in some areas.
Cannabis operators want to pay their taxes, but the rules regarding how to submit payment make it a headache.
The transfer of cash is not only frustrating and difficult, but often risky. Handling that much cash presents a big personal safety risk for cannabis business owners and the agencies collecting the cash.
So the question remains, how can cannabis operators better navigate the tax return process given federal banking restrictions?
Let's explore the process...
EFTPS and Federal Taxes
Generally speaking, ordinary corporations and C-Corps pay the IRS through EFTPS.
EFTPS is a secure website that is linked to the IRS. It is a payment system through which business owners upload everything in a very secure way – and it’s a vast improvement on the previous system. Payments no longer get lost in the mail or counted incorrectly due to human error.
EFTPS is easy to set up a profile and link your bank account; plus, an added security measure allows business owners to set up a second authentication method through a PIN number sent through the mail.
Most traditional businesses use EFTPS for payroll tax deposits. Through EFTPS, the employer collects taxes and then sends them on the employee’s behalf, every pay period, which makes it easy for everyone involved.
Though, for cannabis operators, it is extremely difficult but not impossible to open a business bank account; therefore, EFTPS is not an option for cannabis companies. Cash can’t be transferred through EFTPS.
So as a cannabis operator, how can you pay federal taxes?
Federal Taxes for Cannabis Operators
Here’s how cannabis operators can pay their federal taxes in cash.
The first step is to find the location of your nearest IRS office. In California, there are IRS offices located across the state. Maybe 40% of the offices accept cash. We suggest that you call ahead to make an appointment and make sure that your nearest office accepts cash.
Give yourself plenty of lead time as there are few IRS offices and they have very few appointments available. And they will not give you a 'break' just because you couldn't get an appointment in time for the deadline, so plan way far ahead.
Once you secure an appointment, pack your cash and travel to the office.
We recommend you share the appointment day, time, and place with as few people as possible to mitigate the security risk. You will be traveling with a large amount of cash, so don’t increase your chances of being a target.
When you go to the office and make a payment, know ahead of time that the IRS office may limit the amount you can pay per appointment. If you’re paying $250,000 in taxes (which is not that uncommon), you will likely need to make many appointments. The reason for this is security; the IRS doesn’t want to take the risk of having a huge amount of cash on the premises.
One other thing, make sure you get a receipt each time you pay an installment on your taxes, just in case there’s ever a question down the road.
Alternately, some cannabis companies pay their taxes through the business owner’s personal account, and then have the cannabis company reimburse the business owner. This is a work-around that can save a lot of frustration, but also places a financial burden on one individual.
Workaround for Small Tax Payments
Some operators may just be getting started and not have a huge tax liability, so here's another method to pay your taxes in cash.
If there’s no IRS office near you that accepts cash, you can pay your taxes in cash at a participating retail store like 7-Eleven. The IRS has a program called PayNearMe that allows you to make a cash payment after being verified.
Note that payments are limited to up to $1,000 per day, and can take up to 5 to 7 business days to transmit. Verification also can take two to three business days.
Allow yourself plenty of time and review the limitations before committing to this option.
Paying State Cannabis Taxes in Cash
The steps for paying your state cannabis taxes in cash are similar to the process for paying your federal taxes.
The agency is different – in California, you will make payments to the franchise tax board – but you will need to find a location near you and set up an appointment. Most offices in California accept cash, but some will even take cashiers checks. Make sure to phone ahead and know what the limitations are before you go.
Overall, paying your taxes in cash as a cannabis operators is a burdensome and frustrating process.
We can help you strategize and make the most of the limited tax deductions available to cannabis operators. Get in touch with our team by clicking the get started button below.