How Does Caregiver Income Get Taxed?

[trichcycler]

suggesting a cg "call the money derived from some other hobby or such" is money laundering, and also a felony.

[trichcycler]

"some other" is the key there.

[trichcycler]

Marijuana Taxation explained a bit;

 

"Marijuana Industry Eager to Pay Taxes -- and Cash in on Deductions" says a recent McClatchy headline. There's a conundrum: The state-legal marijuana industry (1) understands that a new federal excise tax would give it legitimacy, but (2) seeks repeal of the discriminatory Reagan-era statute saying that taxpayers "trafficking" in "narcotics" cannot deduct ordinary business expenses on their Federal income tax returns.

 

But that current no-tax-deduction rule makes marijuana advertising nondeductible - and that probably makes sense. For most proponents of marijuana legalization, advertising is a frill, not an essential. But for opponents of legalization, marijuana advertising is anathema.

 

Before looking at taxes, here's the marijuana legalization story. Twenty states have legalized medical marijuana; Washington State and Colorado have also legalized recreational marijuana. All state-legal marijuana sales are made by private taxpayers. That's because no state has copied the cautious state-store monopoly model that more than a dozen states use for liquor. That model, free of the profit motive, provides the least possible incentive for advertising -- and it's the model Uruguay is using for marijuana. But using the monopoly model would mean the state would sell marijuana itself and violate federal law -- which continues to outlaw marijuana.

 

Now for taxes, starting with income taxes: Criminals, those who want to avoid the fate of Al Capone, know to pay taxes even on illegal income. But when marijuana sellers (whose tax returns might discreetly say their business is "Herbal products") fill out their 1040s, they suffer a unique penalty: Federal Income Tax Code's section 280E says taxpayers "trafficking in controlled substances" get "no deduction" for any expenses beyond the cost of producing or buying inventory. They can't deduct perfectly normal selling expenses like travel, utilities, salaries, and advertising -- or even state taxes or fees paid to comply with the law and to file tax returns.

 

280E came into the Tax Code in 1982 when the pendulum of opinion was swinging wildly in favor of the War on Drugs, and when the Reagan Administration was getting all the credit for being tough. Bob Dole's Senate Finance Committee took notice of a Tax Court case that allowed a drug dealer to deduct travel expenses; without hearings, Congress passed 280E to make expenses of drug dealers nondeductible.

 

Other illegal activities -- prostitution, gambling, gun-running -- weren't touched: There is no deduction disallowance for them. They can deduct all their expenses, just as you or I can. Congress singled out drug sellers in 1982 to prove that it, like the Reagan Administration, was really mad at drugs. So state-legal marijuana is now treated like the hardest drugs - and the marijuana industry says "the federal tax situation is the biggest threat" it faces.

 

Scholars suggest that 280E, singling out a single activity for punishment, is an aberration. But as a practical matter, 280E's unique disincentive could make marijuana legalization more palatable to the public. Here's how: Because 280E discourages advertising and marketing, it reduces the ability of the industry to increase marijuana use by creating demand. Opponents of legalization vehemently object to advertising of marijuana on the grounds that it will stoke demand and that it will influence children. By encumbering marijuana advertising and marketing with the burden of non-deductibility, 280E curtails that advertising. In a limited and inadvertent way, 280E moves the legalization debate toward a middle ground.

 

Opponents of marijuana are likely to find, as legalization progresses, that an outright ban on advertising of a federally legal product will face Constitutional free speech scrutiny. Even now, states figure than banning marijuana advertising violates freedom of speech clauses in their own Constitutions. But a tax deduction disallowance, unlike an advertising ban, creates no Constitutional problem. 280E does not ban advertising; it just makes it more expensive. More expensive sounds good: A peace settlement in one theater of the national War on Drugs could involve, among other things, (1) legalization of marijuana, (2) retention of 280E's financial burden on advertising, and (3) imposition of whatever restrictions on advertising are Constitutionally permissible.

 

Still, the industry says 280E is broken -- overbroad and discriminatory. So why not fix it?

 

This question is not just for the long term. Colorado's legislature has already repealed the state tax law that copied 280E. Other legal-marijuana states whose tax rules conform to the Federal Code may want to follow Colorado's lead.

 

What would a fix to 280E look like? While the industry would like repeal, maybe there's a middle ground, drawing bright lines between (1) expenses that tend directly to stoke demand for marijuana (disfavored) and (2) expenses that are existentially necessary for the operation of the business (acceptable).

 

To start with, advertising expenses would still be disfavored. Meanwhile, other expenses seem both necessary and totally disconnected from demand creation -- like a license fee paid to the state just for operating. Legal and accounting fees look acceptable, too (though lawyers and accountants sometimes stray into giving business advice).

 

But there are grey areas. Take rent, for instance. Retail space can be organized to stoke demand: The tobacco industry, banned from broadcast advertising, makes the experience of entering a convenience store a come-on. Square footage devoted to point-of-sale displays is professionally designed to entice buyers.

 

And what about salaries of retail clerks? Effective, motivated sales people can stoke demand. But legislators may be more concerned about creating jobs than about dampening demand for marijuana. So they could cap the tax deduction for pay to for sales people, say at the level of the minimum wage. That approach would tend to favor jobs -- and spread them around. So pay for successful, high-priced salespeople could be only partly deductible -- only up to $7.25 an hour, with the excess nondeductible. The possibilities are endless. A hodge-podge of rules reflecting conflicting policies -- like much of today's Tax Code - could result from an effort to fix 280E. So fixing 280E could prove too complicated.

 

How about the industry's proposal for a federal excise tax on marijuana? Already, Washington State and Colorado will explicitly impose excise tax on sales of the substance at so many cents on the dollar. The industry hopes for a federal excise tax on marijuana only if the tax is part of a deal that includes simultaneous and explicit federal legalization. But politically, federal legalization won't happen soon. There are too few Members of Congress willing to be seen helping the industry.

 

There's a tangential issue: If a new federal excise tax is part of a package containing explicit legalization, objections could arise under decades-old multilateral narcotics treaties that require us to outlaw marijuana. But 280E now is a penalty consistent with illegality of marijuana, so 280E raises revenue but doesn't violate treaties.

 

For now, Congress won't repeal or repair 280E -- Congress doesn't want to give the marijuana industry a tax cut. But the industry is right about one thing: If 280E is repealed, a Federal excise tax on marijuana will take its place. That change could mean a higher tax burden overall for the industry -- and loss of the useful anti-advertising bias of the law today.

[trichcycler]

that's good. I think many would be reporting the income if they were allowed to take the deductions. But in the end, like most other hobbies, paying an accountant, fussing with quickbooks, saving and logging receipts, all just to give away a few bucks to government who jails thousands for doing exactly what you are doing seems insane. I'd agree I think.

 

I wonder if you could just charge rent for the garden slots, and derive your income that way. The rest of the stuff is incidental,like the landlord cleaning your rental windows maybe? dirt, power, and the rest then could be deducted?

[trichcycler]

its getting clearer... "Here's one upshot to declaring ill-gotten gains: If taxes are paid on it initially, and restitution is part of any settlement or judgment, that restitution is then tax-deductible" !!

 

The IRS wants to tax your illegal income

illegal income 1040

The federal government requires drug dealers and embezzlers to pay taxes on their ill-gotten gains. Surprisingly, some do.

 

Dealt some drugs? Stole some cash? There's a line on your income tax form to declare it.

 

As ridiculous as it sounds, the federal government requires that money acquired through illegal means be reported and taxed just like legitimate income. It's right there on the official IRS tax instructions: "Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity."

 

 

 

 

 

Not surprisingly, tax experts say few criminals declare their loot.

 

But some do, often when they've either been caught during that tax year or think they are about to be caught, says Stephen Moskowitz, a San Francisco tax attorney at Moskowitz LLP who has helped several clients document their illegal gains. Their goal is to avoid getting charged twice: once for their initial crime, and again for evading the taxes on their windfall. After all, it was tax charges that ultimately put away Al Capone.

 

Many of today's criminals who choose to declare their illegal income are facing embezzlement charges, according to Moskowitz.

 

Like Tom Hughes, a New England accountant who was caught -- multiple times -- stealing money from his clients.

 

"I knew the money was taxable, there was no doubt about that," says Hughes, who now runs an anti-fraud consultancy called Hire-a-thief. "I had already been caught, and I didn't want to face federal tax charges."

 

He paid taxes on his illegal gains in 1999 and 2001, and again in 2004, after he stole from another client. After a nine-month prison stint, Hughes swears he's now reformed.

 

So how many self-confessed crooks does the Internal Revenue Service deal with each year? The agency isn't saying. A spokesman declined to discuss the issue, saying only that declaring illegal income "is what the law requires."

 

Documenting illegal income is tricky, Moskowitz says.

 

The IRS doesn't require any details on the return beyond an approximation of how much you made. The hard part comes if you get audited. There's usually no paper trail, so IRS agents will typically ask for the names and contact information for people that may have been part of the illegal transaction, Moskowitz says. The agency will then try to verify your numbers with them.

 

If you tell the IRS you made $1 million from stealing money or dealing drugs, does the agency tip off the cops?

 

Legally, it can't, unless a law-enforcement agency gets a court order granting it access to a specific taxpayer's return. The IRS isn't supposed to proactively alert other agencies about misdeeds unless terrorism is involved. In that case, it still needs a court order to disclose anything, but the IRS can initiate the legal process on its own.

 

The rules are all spelled out in an IRS guide to "section 6103," the law that covers tax-return confidentiality. Like many legal statutes, it's complex and filled with loopholes. For example, the IRS might not be allowed to share the contents of actual tax returns on its own initiative, but it can divulge supplemental information obtained from outside sources -- like witnesses interviewed in an audit investigation -- "to apprise federal criminal law enforcement agencies of possible crimes," according to the agency's guide.

 

 

In practice, Moskowitz says he thinks information about illegal activities gets shared.

 

"Do they report you to other agencies?" he asks. "Absolutely."

 

Other experts agree.

 

"The IRS would most certainly immediately report it to law enforcement," says Joseph Henchman, vice president of legal and state projects at the Tax Foundation, a think tank.

 

The IRS' spokesman declined to comment on the issue.

 

Here's one upshot to declaring ill-gotten gains: If taxes are paid on it initially, and restitution is part of any settlement or judgment, that restitution is then tax-deductible, says Moskowitz.

 

If you decide to disclose your illegal loot, make sure to do it with the assistance of a tax attorney, not any old accountant.

 

"If there's anything we suspect is criminal, the first thing we do is tell people to get legal advice," says Gil Charney, principal tax researcher at H&R Block's (HRB) Tax Institute. "We don't have attorney-client privilege. If The IRS or any law enforcement agency contacts us, we have to provide that information."

[mdc623]

What about a caregiver that doesn't grow and just goes out and purchases meds for his or her patient?  If the patient gives them the money to purchase and no profit is made then is that considered a taxable transaction I wonder?

[trichcycler]

probably, if no tax free status exists. I wonder if we can't all just barter. I would be up for it for sure. I need a bobcat guy, an electrician, lawn care for five acres, a windmill erected, a solar battery shed built, a couple holes dug, some trees planted..... my patients would benefit hugely if they came with those barters.

[Habenero]

Bartering doesn't avoid income tax. The irs values the barter exchange at its fair market value.

 

If a patient gives money to a caregiver to purchase meds for them then that isn't income if the money only covers the cost of the meds. That's no different from you getting $3 from your grandma and going to buy her a gallon of milk. It isn't income to you.

[Natesilver]

probably, if no tax free status exists. I wonder if we can't all just barter. I would be up for it for sure. I need a bobcat guy, an electrician, lawn care for five acres, a windmill erected, a solar battery shed built, a couple holes dug, some trees planted..... my patients would benefit hugely if they came with those barters.

 

This is a recipe for a federal tax evasion charge. Oftentimes such charges carry hefty prison time.

[trichcycler]

well, hypothetically, I supply my patients with all of my overages at no cost to them. Some of them like me so much they come over and while they're here, sometimes they mow the lawn, or dig holes on the property.  None of us ever mentioned the barter system, we're just good friends helping each other out, all five of them.

 

what was that recipe again ?

 

[Norby]

Bartering doesn't avoid income tax. The irs values the barter exchange at its fair market value.

 

If a patient gives money to a caregiver to purchase meds for them then that isn't income if the money only covers the cost of the meds. That's no different from you getting $3 from your grandma and going to buy her a gallon of milk. It isn't income to you.

But you can't write ANYTHING off federally?  If you buy an ounce for $200 and sell it to your patient for $200, you just made $200 according to the feds and 0$ according to the state.