Tax Considerations for Businesses Entering VA’s Adult-Use Cannabis Marketplace

When Virginia’s Cannabis Control Act took effect on July 1, 2021, it set the stage for the commercial sale of recreational, adult-use cannabis in the Commonwealth. While it will not be legal to sell recreational cannabis in Virginia until 2024, many businesses and entrepreneurs are already in the process of preparing to file their license applications with the Cannabis Control Authority and take all of the various other steps that will be necessary to hit the ground running. As Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, now is the time for cannabis businesses and entrepreneurs in Virginia to begin thinking about some important tax considerations as well.

What Cannabis Businesses and Entrepreneurs in Virginia Need to Know about Federal Taxes

With the commercial sale of marijuana already legalized in several states, the IRS has previously had the opportunity to address the issue of tax liability in relation to the conflict between state-level legalization and the federal definition of marijuana as a Schedule 1 controlled substance. It has published Marijuana Industry FAQs, and it recently published additional guidance highlighting some key issues and enforcement priorities.

Having made these resources available, the IRS expects cannabis businesses and entrepreneurs to utilize them. By the time Virginia’s first cannabis businesses open in 2024, the IRS will have published even more guidance, and it will have even more experience auditing and investigating cannabis-based businesses. As a result, businesses in the Commonwealth will need to have processes, procedures and systems in place to proactively address tax issues such as:

• Tracking deductible and non-deductible business expenses (as “illegal” businesses under federal law, cannabis-based businesses are limited in the deductions they are eligible to claim)
• Managing payroll, FICA withholdings and employment tax liability
• Managing quarterly estimated tax liability
• Recording cash transactions, reporting cash transactions and paying federal taxes in cash if necessary
• Recording cryptocurrency payments and reporting gain on cryptocurrency transactions

These are just a small sampling of numerous issues that require consideration. Cannabis business taxes are an enforcement priority for the IRS, and the IRS is prioritizing enforcement in the areas of small business compliance and cryptocurrency compliance as well. Thus, cannabis-based businesses fall at a unique confluence, and they can expect to face heavy scrutiny from the IRS in the years to come.

While many business owners and entrepreneurs address tax liability as an afterthought, planning ahead allows companies to avoid unnecessary tax liability and mitigate their risk of facing costly audits and investigations. If you are planning to open a cannabis-based business in Virginia in 2024, we can help you start getting ready, and we encourage you to contact us for a confidential consultation.

Request a Confidential Consultation with Virginia Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

Are you planning to launch a cannabis-based business in Virginia in 2024? If so, we can help make sure you are ready to hit the ground running. To schedule an appointment with Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 703-752-3752, email ket@thornlawgroup.com or contact us confidentially online today.