The House this week passed a bill that could lead to an increase in 1099 reporting volume for financial institutions. The Secure and Fair Enforcement (SAFE) Banking Act would provide a safe harbor from federal investigations or prosecution for financial institutions that take on cannabis businesses as customers in states where cannabis sales are legal.
Cannabis is already a $50 billion industry and shows signs of growing rapidly. By 2022, the industry’s economic impact could be $77 billion, a number larger than the GDPs of nine states. Yet, according to a 2015 Marijuana Business Daily study, 70 percent of businesses that deal directly with cannabis do not have bank accounts.
Representatives support safer cannabis businesses
A separate version of the SAFE Banking Act is currently in the Senate. The bill currently has 33 co-sponsors, including five Republicans. Should something similar to the House version become law, it would open commercial banking to an industry where cash is still king in terms of both taking payments and paying taxes.
Representatives voiced their concerns about the cash-based nature of the business in speeches on the House floor, Tax Notes reported: “I have never met a human being who feels that there’s any good purpose served by forcing them to pay their bills with duffel bags full of $20 bills. Not one person,” House Ways and Means Committee member Earl Blumenauer, D-Ore., said on the House floor. “It’s an invitation to theft, it’s an invitation to money laundering already, it’s an invitation to tax evasion, and it stifles the opportunities of this business.”
Financial Services Committee Chair Maxine Waters, D-Calif., agreed. “Cannabis-related businesses are locked out of the banking system and cannot maintain checking accounts, process payroll obligations, or pay taxes,” she said. “The SAFE Banking Act addresses this serious problem by providing a safe harbor to financial institutions that choose to serve regulated cannabis businesses.”
Rob Nichols, president and CEO of the American Bankers Association, and Jim Nussle, president and CEO of the Credit Union National Association, in an opinion piece for FOX Business, argued for the bill, noting: “Passing the SAFE Banking Act would mark a step forward for public safety in this country and would give financial institutions the certainty they need to fully support their communities. It would also demonstrate that Congress can still come together to solve the nation’s challenges.”
The American Bankers Association has also expressed public support for the bill.
SAFE Banking Act could lead to complexity in 1099 reporting
Cannabis companies signing on as customers with financial institutions would lead to more credit cards, checking and savings accounts, and loans. Of course, all of those developments would, in turn, lead to an influx of Form 1099 reporting for banks and lending organizations.
That could result in challenges for financial institutions, which would need to ensure that their current banking systems could support cannabis transactions and tax reporting related to those transactions. Along those same lines, it’s likely that many institutions will create special financial products to entice cannabis businesses. Those special products could lead to unique and specific 1099 reporting obligations, so banks and lending institutions need to be sure they are prepared for the reporting ramifications of their promotions.
Complicating things further is the role of cryptocurrency in the cannabis business. Some cannabis companies have converted to using crypto coins rather than fiat currency due to their lack of ability to open a traditional bank account. Can traditional financial institutions support both crypto and fiat assets for those businesses, and can they switch back and forth between the two?
Furthermore, crypto regulation is notoriously poorly defined by the IRS. How will banks and lenders report crypto transactions with cannabis businesses? It’s possible right now that they don’t even know, as the IRS has yet to provide clarity on crypto tax reporting. Forthcoming guidance from the IRS will require institutions to quickly adjust their systems and processes in order to avoid penalties and mitigate risk.
Financial institutions that do not have updated or automated processes for filing 1099 forms could face difficulty in keeping up with compliance requirements. Centralization and automation of reporting processes are critical to reduce risk and ensure efficiency.
Sovos has four decades of experience enabling financial institutions to adapt to changes in 1099 reporting.