Why Your Cannabis Business Needs to Report Cash Payments Over $10,000 to the IRS

Because marijuana is still classified as a Schedule 1 controlled substance under federal law, most banks still refuse to accept deposits from cannabis businesses. The result is that majority of cannabis dispensaries operate, to a large extent, sometimes almost exclusively, as a cash-based business.

The effects of this on the cannabis industry are significant, particularly when it comes to tax compliance. First, of all, despite being classified as a controlled substance under federal law, income derived from “illegal activities” are still taxable by the IRS. “Taxable income” as defined, is simply “gross income minus allowable deductions.” (I.R.C. § 63(a)). That means that if you receive any income in the form of money, property, or services in a tax year, you have taxable income that you need to report. It doesn’t matter if such income is derived from what is classified as illegal activities.

In fact, one of the more controversial legal provisions for cannabis businesses is the one that confirms the taxable nature of income from cannabis businesses, and yet at the same time penalizes the “illegality” of the business by not allowing any credit or deduction for any “trade or business that consists of trafficking in controlled substances.” (26 U.S. Code § 280E)

Secondly, for operating as a cash-based business, cannabis businesses have additional tax compliance requirements, including one that has gained some level of notoriety over the past few years: Form 8300.

What is Form 8300?

Rather ironically, the law requiring the reporting of cash transactions (i.e., outside of bank transactions) of over $10,000 is found in the Bank Secrecy Act. Originally, the general reporting requirement in the Act was intended for financial institutions, where banks and other financial institutions are required to report possible instances of money laundering. Several amendments later, the Bank Secrecy Act now requires businesses and individuals (not just financial institutions) to report transactions of $10,000 or over. The theory is that large cash transactions are often used by those engaged in illegal activities to launder money, particularly smugglers, terrorists, and those involved in the illegal drug trade, and the information provided in those reports can assist the government in cracking down on organized crime.

Form 8300, otherwise known as the Report of Cash Payments Over $10,000 Received in a Trade or Business, was born.

Why You Need to Report Cash Payments of Over $10,000 to the IRS

Without currently going into the nitty-gritty of Form 8300, what is important for you to know at this point is that the failure to file Form 8300 can carry heavy penalties, even outside of the fact that not filing Form 8300 at all, when the IRS knows that the cannabis industry operates primarily as cash-based, can trigger an IRS audit. 

That does not mean that your business is being looked into as a possible suspect for money laundering, despite the intent of the reporting requirement in the first place, and despite the fact that you will likely be filing as a legally-registered cannabis business. Form 8300 is required for any and all cash-based transactions that meet the prescribed amount. Now, if your business had a bank account and you conducted all your business transactions through bank transfers and payments, you wouldn’t be required to file Form 8300. Then, if there were any red flags raised, it would be the bank’s responsibility to report “suspicious transactions” that might involve money laundering. But because you probably don’t have a bank account, you should file Form 8300 yourself or you might find an audit breathing down your neck.

Form 8300 can be troublesome if not handled appropriately. Literally, each transaction, whether singly or spread out in two or more related transactions, that involve the exchange of cash exceeding $10,000, has to be reported within 15 days from the date of receipt of the cash. For an industry that has grown exponentially over the past few years, this can literally mean tons of continuous monitoring, transaction reviews, paperwork, and filing just to stay on top of the reporting deadlines.

And the penalties for failure to file can be harsh, including possible charges for a felony under IRC Section 7203, sanctions of up to $25,000 for individuals and $100,000 for corporations, plus imprisonment of up to five years. This does not include the civil penalties for:

• failure to file;
• failure to timely file;
• intentional disregard of the requirement to timely file;
• negligent failure to furnish a timely, complete, and correct notice required to be identified on the form; and
• intentional disregard of the requirement to furnish timely, correct, and complete notices

Each civil penalty imposed is per return or per statement, and really one act of failure to file Form 8300 could conceivably even fall within any one of these instances where civil penalties are imposed. Even a small delay on your part could open up your cannabis business to a world of hurt, triggering an IRS audit, criminal and civil penalties.

So, if you own a cannabis business, you should make it your business to know Form 8300 like the back of your hand.

–Jin Kim. Attorney Jin Kim practices cannabis tax law in Sacramento, California. She helps individuals and businesses resolve their federal, state, and local tax debt.