Archives for January 2020

Cannabis Lounge Additions

Berkeley, CA joins the ranks of Los Angeles, Palm Springs, and San Francisco in allowing cannabis lounges where marijuana can be consumed on premises.

In October of 2019 Los Angeles was the first to permit a cannabis lounge in the state. Lowell Cafe, situated in West Hollywood is both a restaurant and lounge. And several more were not far behind with Los Angeles now home to so many cannabis lounges there is now a Top Ten on Yelp.

With the success of lounges in California other states where marijuana is legal are also considering allowing businesses to open lounges for consumption on site. Could “pot bars” become the new local bar?

California and Taxes

When one thinks about taxes in California, one immediately goes to Prop 13, possibly the tax amendment with the widest ranging impact on life in California. The proposition, which passed in 1978 essentially froze property value in place until a property changed ownership. It also froze the rate of property tax at 1% of value at sale. Immediately on effect it drastically reduced funds to the state and to local governments. That plummeting revenue sent them into the dilemma of how to fund their governmental responsibilities.

Californians among the highest taxed in the nation

Since then, the state has relied heavily on the income tax, and some have argued excessively on the wealthiest Californians. The effect without the higher property tax revenue coming in has been a continual cycle of boom and bust. The effort to level out this cycle has resulted in the marginal income tax rate rising to the highest in the nation.

The other tax which has increased to among the highest in the nation is the sales and use tax, the state rate currently 7.25%.

Local municipalities experienced the decreased revenues from the lowering of property taxes in their ability to fund education and other local needs. One of the remedies available, was to levy a local income tax. A few cities, like San Francisco, have taken advantage of this option. But more common are local municipalities levying an increase to the sales tax. This is available to both counties and cities and throughout California these bodies have taken advantage of it to fund schools, roads, county and local services and public health and safety.

While argument has been made that California’s tax code needs change the state finds itself almost in a Catch-22, with making changes to Prop 13 being a sort of “third rail” of reform. Particularly since property prices in California have historically been high compared to the rest of the nation there is little stomach for pushing the property tax higher. Given that limitation the state must rely heavily on income tax and sales and use taxes to fund the state’s business.

Could Legalization Be That Easy?

Many presidential candidates have floated opinions about the legalization of cannabis. Many, like Independent candidate Lincoln Chafee, favor and end to the “war on drugs”, or like Democratic candidate Pete Buttigieg, tie legalization to criminal justice reform.

Could an executive order legalize cannabis?

Recently, Democratic candidate Bernie Sanders’ campaign floated several ideas for executive orders that might be undertaken on “Day One” of his presidency should he be elected. Among them is an order to direct the Justice Department to legalize marijuana.

The idea is deceptively simple, and probably a longer process than a stroke of a pen. What a President can do is instruct his Attorney General, by executive order, to begin the process of removing marijuana from Schedule 1. His Attorney General would then undertake the process of rescheduling cannabis which would, no doubt, include months of research, committees, and testimony by all sides of the issue.

Sanders, should he be elected, might take a course of action much like the Obama Administration’s stance. Rather than attempting to directly legalize, it effectively decriminalized marijuana use in states where it was legal by directing his Justice Department to de-prioritize pursuit of cannabis users. Since executive orders only direct the Federal government they are limited to effecting change in those government bodies. So, while a de-prioritization tack would affect the cannabis industry in states where it has been legalized, it couldn’t stop states and municipalities from enforcing their current laws.

EITC – Easily Find Out If You Qualify

The earned income tax credit benefits working individuals and families with low to moderate incomes. EITC can lower a taxpayer’s taxes, and even result in a refund. The IRS has an easy questionnaire on its website where you can find out if you qualify before you file.

Use the IRS form to find out if you qualify

To take advantage of this credit, taxpayers must file a tax return and claim the credit. They should do so even if they don’t owe tax and aren’t required to file. EITC can be worth up to $6,557 for tax year 2019.

Taxpayers should first find out if they qualify for the credit. Here are some things for taxpayers to consider:

•Major life events may cause taxpayers to move in and out of eligibility for the credit from year to year. Because of this, it’s a good idea for people to find out if they qualify.
•Eligible taxpayers must have earned income from working for an employer or from running or owning a business or farm. They must also meet basic rules.
•Taxpayers without children may also qualify for EITC.
•Taxpayers can’t claim EITC if their filing status is married filing separately.
•Taxpayers must have valid Social Security numbers for themselves, their spouse, and any qualifying child listed for the credit on their tax return.

Before claiming the credit, taxpayers should also learn the EITC rules:

•Taxpayers may be married or unmarried. If married, they must file a joint return.
•Those who claim the credit without a qualifying child must meet rules for age, residency and dependency.
•For a child to qualify, they must live with the taxpayer for more than six months of the year.
•In addition, the child must meet rules for age, relationship, support, citizenship and joint return.
•Special rules apply for members of the U.S. military serving in a combat zone.

Even Big Cannabis Struggles in CA Market

California industry giant, MedMen, is selling its holdings in Arizona — a state it entered a little more than a year ago. It is also selling a factory in Illinois to help the multi-state operator cut costs and shore up cash. In part, the company is trimming down its holdings in order to focus more on markets like California.

California cannabis industry a lot to navigate successfully

CNN reported recently that MedMen has been struggling with cash flow problems, falling behind in paying vendors. Speculation ranges between too fast growth and asset grab issues. But most certainly, the Culver City, CA based company struggles to navigate the California market like all licensed cannabis companies in the state who continue to compete with black market cannabis, a part of the industry that persists even three years after legalization and is not beholden to the same requirements.

And another rub for the marijuana industry. Despite reports that MedMen is heading into “bankruptcy”, that is not an option available to marijuana businesses because cannabis remains illegal on the federal level.

All along the supply chain the industry can struggle with the ever-changing regulation landscape. Growers are faced with recalls almost inevitable. The culprits are often mold or yeast, not pesticides or other man made contaminants.

Retailers also compete for business with unlicensed, black market retailers which can look a lot like “real” dispensaries. The BCC recently implemented a requirement to post QR Codes, an attempt to inform the public whether a retailer was licensed and to help protect health and safety.

The industry took a hit, along with non-cannabis vape industry, late last year with the emergence of a lung disease connected to vaping and e-cigarettes consumption, sending even stock offerings plummeting.

California’s 3rd phase of testing regulations went into effect at the end of last year, increasing testing costs to cultivators. Some growers worry that the cost of compliance is getting too high to sustain.

And, of course, the taxing structure in the California industry continues to be daunting, amounting to over 30% of retail price, one of the highest in the nation. The direction of cannabis tax rates does not appear to be going down any time soon, despite attempts by the Legislature to give the industry some relief. The CDTFA increased the markup rate as of the new year, requiring an increase in collection of excise taxes from retailers to distributors.

Due dates for backup withholding forms upon us

Some businesses and other payers take out backup withholding from payments they make to certain people. These entities should remember their upcoming filing deadlines.

•Friday, January 31 to report nonemployee compensation payments
•Tuesday, March 31 to report all other payments

Form 945, Annual Return of Withheld Federal Income Tax
Businesses and other payers must report backup withholding and any other federal income tax withheld from nonpayroll payments on Form 945. The deadline for filing Form 945 for tax year 2019 is Friday, January 31, 2020. However, if the payer made deposits on time and in full, the deadline is Monday, February 10, 2020.

Information Returns
Visit IRS.gov for forms and information. The information returns listed below are used to report backup withholding for tax year 2019. They’re generally due to the IRS on Friday, February 28, 2020, for paper filers and Tuesday, March 31, 2020, for electronic filers.

These information returns are
•Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.
•Form 1099-DIV, Dividends and Distributions
•Form 1099-G, Certain Government Payment
•Form 1099-INT, Interest Income
•Form 1099-K, Payment Card and Third-Party Network Transactions
•Form 1099-MISC, Miscellaneous Income
•Form 1099-OID, Original Issue Discount
•Form 1099-PATR, Taxable Distributions Received from Cooperatives
•Form W-2G, Certain Gambling Winnings

Information return filing extensions
A payer can request a 30-day extension to file any of the information returns listed above by filing Form 8809, Application for Extension of Time to File Information Returns. An extension is usually granted automatically.

However, the IRS does not automatically grant an extension for someone filing Form 1099-MISC reporting nonemployee compensation payments. Payers who need a 30-day extension to file this form must meet one of the criteria listed on line 7 of Form 8809.

Changes to IRA Distribution in 2020

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) became law on December 20, 2019. The Secure Act made major changes to the Required Minimum Distribution (RDM) rules. If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.

New law gives more time to withdraw from IRAs

Your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Roth IRAs do not require withdrawals until after the death of the owner.

You can withdraw more than the minimum required amount.
Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

BCC Regulations to Protect Public Safety

Late last week the California Bureau of Cannabis Control (BCC) released an emergency regulation requiring cannabis business to post and make available to the public their unique QR Code, (Quick Response Code) given to them by the BCC. The code is familiar to consumers as a way to link to information about a business. The BCC hopes that the posted codes will allow consumers to quickly identify a legal cannabis business.

According to the Center for Disease Control and Prevention (CDC), as of November 13, 2019, there have been 2,172 lung injury cases and 42 deaths associated with using ecigarette, or vaping products reported across the country. From these cases, the CDC collected fluid samples from the lungs of 29 patients. Of the 29 samples, THC was identified in 82%. The CDC now recommends that those individuals using e-cigarette or vaping products should not buy the products from informal sources, or “off the streets.”

Legal cannabis businesses are required to put their products through significant testing for safety and product control. Use of “black market” cannabis products poses a public health risk. The BCC and CDPH hope that giving the public clarity on licensed retailers will help the public avoid purchasing unsafe products.

As of November 12, 2019, the California Department of Public Health (CDPH) has recorded 163 cases of Vaping-Associated Pulmonary Injury in the state of California. CDPH has been able to survey 86 of these individuals. Of the individuals interviewed, 71 of the 86 individuals, which equates to 83%, reported consuming vaping products containing THC. Of the 71 that consumed vaping products containing THC, only one individual reported buying THC vaping products from retailers licensed by the Bureau. The other 70 individuals surveyed reported buying THC vaping products from unlicensed sources. From these studies, it has been determined that the risk of harm to the public is greater from the use of THC vaping products obtained from unlicensed sources.

Active Duty and Reserve – Cannabis Still Off Limits

The Department of Defense (DOD) is reaffirming that CBD is off limits to service members, regardless of the federal legalization of hemp and its derivatives.

Despite legalization in many states, US military use is verboten

Despite predictions that up to 40 states will have some form of legalized marijuana in 2020, including conservative states like South Dakota and Mississippi, US servicemembers are still prohibited from using cannabis in any form, including for medical use.

In separate posts published this month, the U.S. Air Force and Military Health System said that while CBD products have become abundant since the passage of the 2018 Farm Bill and can be found on store shelves throughout the country, military policies remain unchanged such that enlisted individuals cannot partake. No exception is made for legality in any state or jurisdiction. The ban covers all military branches. Even NASA reiterated that their employees are not allowed to use any cannabis products, legal or illegal.

Gig Worker Help

Taxpayers who work in the gig economy need to understand how their work affects their taxes. A little pre-planning can help make sure gig economy workers are prepared when it’s time to file their tax return.

Whether you are gigging full time, parttime, casually or get a 1099 or not, your income may be taxable

First things first, here’s a quick overview of the gig economy:

The gig economy is also referred to as the on-demand, sharing or access economy. People involved in the gig economy earn income as a freelancer, independent worker or employee. They use technology to provide goods or services. This includes things like renting out a home or spare bedroom and providing car rides.

Here are some things taxpayers should know about the gig economy and taxes:

Money earned through this work is usually taxable.
There are tax implications for both the company providing the platform and the individual performing the services.
This income is usually taxable even if the:
   o Taxpayer providing the service doesn’t receive an
      information return, like a Form 1099-MISC, Form
      1099-K, or Form W-2.
o Activity is only part-time or side work.
    o Taxpayer is paid in cash.
People working in the gig economy are generally required to pay:
    o Income taxes.
    o Federal Insurance Contribution Act or Self-
       employment Contribution Act tax.
    o Additional Medicare taxes.
Independent contractors may be able to deduct business expenses. These taxpayers should double check the rules around deducting expenses related to use of things like their car or house. They should remember to keep records of their business expenses.
Special rules usually apply to rental property also used as a residence during the tax year. Taxpayers should remember that rental income is generally fully taxable.
Workers who do not have taxes withheld from their pay have two ways to pay their taxes in advance. Here are these two options:
      o Gig economy workers who have another job where
         their employer withholds taxes from their paycheck
         can fill out and submit a new Form W-4. The
         employee does this to request that the other
         employer withholds additional taxes from their
         paycheck. This additional withholding can help cover
        the taxes owed from their gig economy work.
      o The gig economy worker can make quarterly
         estimated tax payments. They do this to pay their
        taxes and any self-employment taxes owed
        throughout the year.