I would agree with motherlode. If you are running a large dispensary or some sort of other larger cannabis business that is netting hundreds of thousands of dollars then setting up a LLC and paying taxes as a cannabis grower makes more sense. However for smaller growers I really doubt it is worth the hassle and risk. Remember that even though it may be legal to buy and sell medical cannabis here in California, you are still supposed to operate as a NPO (non-profit organization) if you are doing that. To sell cannabis, even medical cannabis for profit is still illegal, period. The IRS may not care too much where your money is coming from so long as you pay the taxes on it, but if you ever get busted or run into legal troubles, having those sales on record will generally do you far more harm than good. Here in Mendocino I've seen people get absolutely crucified by the local DA and LEO's for having those sort of records after being busted or running into other legal troubles. It is not like it is that hard to cover up where smaller amounts of cash are coming from anyway. Just file a 1044 form with the IRS and make up some other source for the income.
Also, you can be gifted cash tax free as well. I believe the max amount that can be given tax-free is still $12k a year per person but it changes sometimes from year to year. This is another way to deal with extra money as you can give it to a family member and then have them write you a check, which can then be deposited into a bank account tax-free. For example, you could give say your mother or brother $3,000 in cash and they could write you a check for $3,000 in return. The money gets white washed into a legit account this way, there is no question of where it came from, and best of all, you don't even have to give the IRS a cut since it is a "gift".
