Jim Marty: The Two Crippling Compliance Issues for Cannabis Industry [VIDEO]

Marijuana: Sort of legal, very challenging.

By CPA Trendlines
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Denver CPA Jim Marty had been practicing for decades as an independent, but that all changed thanks to the legalization of marijuana in Colorado. Today he runs a nationwide network of CPA firms focussing on cannabis industry clients, perhaps the largest collection of cannabis-specialist CPAs in the country.

The growth of CPA Jim Marty’s Bridge West LLC has been phenomenally fast, but he was able to do it only with extraordinary due diligence in a field where legality is a matter of whom you ask.

Possession of and trafficking in marijuana is still a federal offense, but the Department of Justice is turning a blind eye in states where it is legal. The IRS still gives it the special treatment that’s reserved for crack dealers and meth labs.

“There are two challenges with legal cannabis in the United States for adult use,” Marty told us. “Those are: IRS Code Section 280e and the banking issue. If we fix those two issues, we’ll have a real industry for adult-use cannabis whether for medical or recreational use.”

Under Section 280e, all the costs of growing and purchasing the product are deductible, but retail expenses — retail rent, labor, advertising, health insurance, 401k, and such — are not.

“280e was really designed to keep drug dealers from deducting their Uzis, their bullets, their costs of selling cocaine and other drugs,” Marty explains. “And the IRS is enforcing this rigorously. The upshot of that is that some of my clients find themselves in a tax bracket over 100 percent.”

Ouch.

There are a few ways around that, at least a little around, and the nationwide network of practitioners that Bridge West has formed might be able to explain it in better and more authoritative detail than we can offer here.

The other challenge is banking, which Marty describes as simply “impossible.”

Under the Bank Secrecy Act and the anti-money-laundering laws, a bank cannot take on a cash-based business. If a client is bringing in tens of thousands of dollars in cash every few days, a host of questions have to be asked, a raft of federal forms filled out.

“A lot of dispensaries are doing a million dollars a month in cash,’ Marty says. “They pay their employees in cash, they pay the IRS in cash, they pay the state of Colorado in cash, their withholding taxes, sales taxes, all in cash.”

The IRS and the state of Colorado now have money-counting machines in separate rooms with witnesses who can attest to the amounts transferred in exchange for a receipt. Marty makes sure his clients issue 1099s and respect the $10,000 limit on transactions and file the proper forms.

“The cash is a challenging issue,” Marty says, “Most of my clients have some banking, limited banking, but they really can’t use it. If you walk into a bank with ten or twenty thousand dollars every day or two, it doesn’t matter what business you’re in. It could be a car wash or a grocery store; the bank is going to ask a lot of questions to comply with the AML and bank secrecy laws.”

Marty is confident that these two challenges will get fixed. The only question, he says, is when.