How Do Unbanked Businesses Pay Cash Tax Payments to the IRS?
The cannabis business largely remains unbanked. While some businesses have limited banking options, for the most part transactions remain in cash. Payments like cash tax payments, can be difficult to make.
For some transactions, cash works ok – as long as they are tracked and proper accounting and record keeping are in place. Sales, vendor purchases, employee payments, and even some tax payments aren’t too inconvenient to pay in cash.
For example, Michigan Treasury Field Offices accept cash payments for smaller amounts, like sales or payroll withholding. Large cash payments should be paid at the Field Office in Lansing. Locate the nearest Field Office and call first to ask about any limits in the amount of cash accepted. Field Offices are located in Flint, Grand Rapids, Escanaba, Kalamazoo, Traverse City, Sterling Heights, Lansing and Detroit.
Cash however does become a problem when making payments to the IRS, such as for corporate income taxes or federal payroll withholdings.
Cash payments to the Internal Revenue Service are accepted up to $1,000 per day at certain 7 Eleven stores. You read that right! Local convenience stores accept cash payments to the IRS. All you need to do is schedule an appointment. Check out this link for more information.
The issue however is the $1,000 per day limit on payments. Assuming you went everyday to pay $1,000, you could pay up to $352,000 in taxes with cash to the IRS. Fees in doing so would be relatively minimal – around $1,500 for the year. This option for most is just not practical however. Scheduling regular cash payments in this manner would be very time consuming. Seven Eleven stores are also not located in all areas of Michigan. This method may pose other problems or risks for the payer as well, especially in transporting the cash.
Another option for paying federal taxes for an unbanked cash business is to pay with money orders. The reality is this option is only slightly less inconvenient than the former.
The daily limit on money order purchases is $10,000, or $3,520,000 per year. That should be enough for most businesses to pay their taxes. A business’s gross profit would need to exceed $16,761,904 per year to need to pay more at a 21% tax rate. This does not include payroll withholding taxes however.
Money orders are available at banks, the post office, grocery stores and some convenience stores.
Money orders are acceptable by mail and in person at IRS Field Offices. There are IRS Field Office locations throughout Michigan, including in Detroit, Flint, Saginaw, and Grand Rapids. If money order payments are mailed, they should be by certified mail to the appropriate IRS certified mail reception address, located in Kentucky for Michigan payers.
Businesses should make quarterly estimated income tax payments. A CPA specializing in the cannabis industry can help prepare tax estimates, including ensuring 280E allowable deductions are correct.
The IRS requires all businesses to pay tax via their online payment system with a bank or credit card. If not, the payer will get a penalty fine. More information is on the IRS’s website, here.
Cash based businesses who pay taxes with money orders, or check, should expect to receive a penalty notice from the IRS after the payment is processed.
However, because banking is not an option, after receiving the penalty notice, the cash business can apply for relief.
The business needs to respond to the notice with proof that banking is not available. Proof includes a “shut down” notice for bank account closure, or denial of a bank account application.
If the business can prove bank unavailability, relief is good for up to 24 months. The business should actively continue to seek a banking option however, and prudently maintain records of denials/account closures.
A CPA or attorney can help you prepare this communication. Your CPA or accountant can also help you with record keeping for financial related items.
As entrepreneurs quickly learn in the cannabis business, nothing is easy. Every process is exponentially more complicated than most other industries. Cash based tax payments are no exception.
The underlying dilemma in convenient and tracked payment options is the lack of banking itself. As the cannabis industry continues to move forward, business owners, regulators, and financial institutions should proactively work towards solutions.
Of course, paying taxes for unbanked cannabis businesses isn’t the only tax related problem entrepreneurs will encounter. Complying with internal revenue code 280E creates additional complications (and a higher tax bill!) It is important for any cannabis entrepreneur to diligently work with an expert for accounting and tax related matters, including bookkeeping, 280E cost allocations, and tax preparations.
At LC Solutions Michigan PLLC, our team is ready to help your business with its accounting needs! We offer bookkeeping, record keeping, CFO services, MMFLA attestations, tax services, and more. Contact us for a free consultation or more information, or check out our blog here. Follow us on Facebook for daily accounting tips, financial information, and cannabis industry news.