Cannabis, Tax and Accountability

With recent New Jersey Top lawmakers introducing a bill to launch the Cannabis industry after voters made adult recreational use legal in the state. Will others in the Tri-state (New York and Connecticut) follow?  Will neighboring states Pennsylvania and Delaware get in on the action as well?



The Cannabis industry has been a growing and booming economy before the deadly Coronavirus stopped the world. When most business industry sales have taken a serious hit due to the Coronavirus pandemic. The cannabis industry has shown to be recession-proof like alcohol and deemed an essential business. The industry has true resilience growing and staying afloat without Government stimulus funding, while still being illegal on the Federal level. The lack of ability to gain access to normal banking is an enormous problem for the Cannabis industry. Having to run a $20 million business in all cash causes a ton of headaches that can only be resolved by the Federal Government.


Normally, when a Cannabis bill is passed that means massive tax compliance and regulations are being implemented for manufacturers, distributors, retailers, and cultivators. All businesses will be required to in some capacity to pay sales and excise tax, cultivation tax, and secure either a seller or distributor permit to make cannabis sales. Cannabis tax revenue can boost states bottom line financially by creating a new stream of income. But state lawmakers need to be mindful of not taxing a company out of business and creating a stronger illicit market. Also, any legislative plan to legalize and tax cannabis needs to restore the communities shredded into pieces because of marijuana prohibition.


A thriving industry with endless list of demands to stay compliant that only a professional accountant can iron out sounds like an ideal client base, but the work may present some challenges. Should the business be on Cash or Accrual basis of accounting? Generally, the accrual method in the cannabis industry allows the accountant to lower business taxable income by increasing the Cost of Goods Sold (COGS). Although, marijuana is illegal under federal law all revenue from selling of cannabis is taxable. And under IRS Section 280E forbids all “non-cost of goods sold” expenses for a cannabis business non-deductible. Being limited in the amount of business expenses taken increases the level of taxes being paid by a cannabis business. In turn, may create some form of cash-flow problems down the line.


The Cannabis plant continuing to be illegal on the federal level makes it hard to break the negative stigma. However, legalization in each state will continue to grow it is not a matter of if, it is a matter of when. Already several states have some form of legalization and that will continue to grow. With more states legalizing cannabis that will help unify the regulation of the plant. A recently passed bill called Marijuana Opportunity Reinvestment and Expungement (MORE) Act would federally decriminalize cannabis by removing it from the government’s-controlled substance list. Although, the MORE Act is a long way from being passed as a law the industry is one step away from being a bona fide federal legal business.


Written By: Dwayne Ailey

Tax Manager