According to experts, the US cannabis industry is estimated to be worth $92 billion by the end of 2021. But, like most things in cannabis, the laws surrounding banking are hazy. With federal and state laws conflicting on legalization, the money made in cannabis is nearly impossible to bank with, especially FDIC-insured accounts.
How are federal lawmakers seeking to clear the smoke, and what does that mean for business owners trying to navigate the gray areas of cannabis banking? We’ll answer those questions and more, in our ultimate guide on banking for the cannabis business.
What makes Cannabis Banking so Difficult?
The glaring issue with cannabis banking lies within conflicting federal and state laws. Even though cannabis is legal in the majority of US states, medically or recreationally, it’s still technically illegal federally.
But big-time banks, where most businesses deposit their cash, are insured by the FDIC (Federal Deposit Insurance Corporation). Being federally regulated, restrictions are in place for accepting money made from sales of a Schedule 1 classified ‘drug’ per the Controlled Substance Act. Meaning banks themselves can be punished for doing any type of business with cannabis brands.
This disconnection of state and federal laws is causing a blatant issue for cannabis business owners. They can accept cash and payments within their legal states, but without being able to safely or securely bank with it, the same as any other industry.
Speaking of payments, processing companies have been just as difficult at accepting and securing account funds as banks. Which has caused many medical dispensaries, and adult-use storefronts to limit transactions to cash-only.
Big wads of cash are obviously a draw for criminal activity, and burglary – leading to an additional security issue for cannabis business owners, too.
Federal Legislation, On the Forefront
Luckily, there is federal legislation on the forefront that’s seeking to reform cannabis banking issues. The SAFE Banking Act and MORE Act 2021, have been in the works for quite some time. Unfortunately with the tumultuous election of 2020, and legislature pauses from COVID-19, the bills are still in queue to be officially passed.
For the SAFE Banking Act 2021, legislators are hopeful the comprehensive language will move forward in approval, soon. Even addressing security issues as a blatant reason to pass the Act ASAP in a recent letter.
The communication sent to the Senate Banking Commission Chairman by Senators Jeff Merkley (D-OR) and Steve Daines (R-MT) is now urging movement on legislation stating, “This is not simply a matter of banking. The inability of these state-legal entities to bank their significant cash reserves is an issue of public safety.” While citing a rise in robberies and burglaries of dispensaries in their own respective states, as reasoning.
When passed, the SAFE Banking Act sets out to create legal parameters for banking institutions doing business with cannabis clients, without penalties, or fines. Specifically, the Act seeks to prohibit:
- Regulators’ ability to terminate or limit deposits, or insurances of financial institutions, while banking with a cannabis business.
- Regulators’ ability to ban financial institutions (like lenders, and credit card processors) from offering financial services to cannabis businesses.
- Regulators’ ability from discouraging financial institutions from accepting cannabis clients or accounts.
Another cannabis-specific bill that’s just been brought back to the legislature, is the MORE Act. Serving as a method to fuel federal legalization 2021, the MORE Act stands for ‘Marijuana Opportunity, Reinvestment, and Expungement’.
Jerry Nadler (D-NY) who reintroduced the bill this month cites recent state approvals, as a primary source to approve the progressive legislation stating, “Since I introduced the MORE Act last Congress, numerous states across the nation, including my home state of New York, have moved to legalize marijuana. Our federal laws must keep up with this pace.”
Altogether, the MORE Act sets out to:
- Remove cannabis from the Controlled Substance Act
- Expunge cannabis-related offenses from the records of individuals
- Allocate funds towards individuals and communities negatively affected by the ‘War on Drugs’
Even though Democrats have control of both the House and Senate, insiders predict it will take a lot of support to pass the MORE Act, due to its robust nature and implications.
The IRS and Codes to Know
Beyond just banking, cannabis-related businesses are also struggling with the IRS, and outdated tax requirements and codes. One of the most egregious cannabis business tax issues comes from IRS code 280-E. The code specifically places limits on ‘businesses that traffic marijuana in contravention of federal or state law”. Due to the code verbiage, cannabis businesses are forced to pay income taxes on gross profit vs. net and severely limits what cannabis businesses can deduct at tax time.
This means some cannabis businesses can reach taxation rates up to 90%+ each year. Right now, the only way around the issue is removing the Schedule 1 classification of marijuana, or by making specific exceptions with legislation for states who have legalized the plant for medical or recreational use.
Now, to circle back to the issue of cannabis businesses making most transactions with cash – the IRS has something to say about that, too. The IRS specifically requires any “person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file Form 8300”. Making the process of handling and managing taxes that much more intricate and difficult for cannabis business owners. Especially considering the form must be filed within 15 days of the transaction.
Fortunately, the IRS has made some progress on servicing cash-heavy industries, like cannabis for now. They now offer options for “unbanked” taxpayers, like allowing cannabis businesses to pay their taxes in cash if need be.
Best Practices for Cannabis Banking
If you’re a current cannabis business owner or thinking of getting into the industry, don’t be discouraged. The future has never been brighter for the industry, or more abundant in banking access strategies for cannabis-related businesses, despite the issues that remain.
Just be sure to keep in tune with the best practices for cannabis banking, like the following tips for ultimate success:
- Maintain good record-keeping practices for IRS and tax purposes.
- Set up automatic procedures to report large cash transactions.
- Seek out local credit unions, or smaller institutions that can lend, insure and deposit cannabis business-related funds.
- Work with a cannabis-specific accountant for taxes and financials.
The Future of Banking for Cannabis Businesses
With two-thirds of the US now in approval of cannabis legalization, there’s never been a better time to make the industry more legit. Including necessary reform for cannabis banking.
As the industry reaches nearly $100 billion in sales, it’s only negligent to deny cannabis business owners the right to safe financial practices. This is a point, many Republican and Democrat politicians are seeing eye to eye, and coming together to address.
Stay in tune with all the legislative updates to come. In the meantime, keep our best practice tips in mind, for safely banking in the CannaBiz.
