5 Tips To Help You File Your Cannabis Businesses Taxes
It's that time of year again ~ Tax Season.
Here are 5 tips you can use as your cannabis business prepares for its 2019 tax season. With proper planning, your business will be able to take advantage of legal deductions commonly missed.
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As a cannabis business owner, you can expect a lot of scrutiny from both state and IRS agents who will be looking for reasons to penalize those who are not compliant.
If this recent court case of Harborside vs. the IRS is any indication, the tax authorities are showing no mercy in prosecuting negligent or non-compliant cannabis operators.
And on a side note, contact us if your business sells both Farm Bill compliant and non-compliant Hemp base products as your tax and accounting strategy will need to be reviewed.
The good news is that with these tips you'll be prepared.
5 Tips To Help You File Your Cannabis Businesses Taxes
Tip # 1 - Understand Your Businesses' Accounting Method
Does your business practice Cash or Accrual Accounting, and do you know the difference?
Our CPAs generally recommend our cannabis business clients choose the accrual accounting method versus cash.
Although the accrual method of accounting is more complex, we believe the benefits of this accounting method for cannabis businesses outweigh the cost of outsourcing monthly bookkeeping duties.
We generally recommend the accrual method for businesses in the cannabis industry because it allows a trained Cannabis CPA to lower your taxable business income, by increasing your COGS, where applicable.
So whether you operate your business on a cash basis or accrual accounting method, you should know the Pros and Cons of each in terms of financial reporting clarity as well as the impact it can have on your cannabis taxable business income.
Tip # 2 - Understand the general rules that apply to marijuana sales
All revenue from selling marijuana is taxable, even though its sale is illegal under federal law.
What this means is that although the Federal Government considers cannabis illegal, without a plan your business may be taxed on every single greenback you’ve made from the green plant.
Keep in mind that revenue under the accrual method will include all sales made during your fiscal year, whether or not you’ve received payment.
If your business operates using the cash method of accounting, then your cannabis revenue will include only items where you have received payment.
Although you may feel the temptation to circumvent the unfavorable cannabis tax laws ~ don’t.
The IRS has a fairly extensive audit on detecting schemes with businesses that primarily deal with cash.
Items Commonly Included in Income:
- Gross receipts – be sure to understand the difference between cash and accrual accounting, as the method you choose can affect what you report
- Returns and allowances
- Business checking/savings account interest (1099-INT or statement)
- Other income – such as rent from a non-cannabis industry related party. Be sure that the leasing agreements are charging fair market value rents to avoid trouble.
Tip # 3 - Cost of Goods Sold – Consider becoming an expert in COGS for cannabis companies or consider outsourcing it to professionals
COGS for a cannabis business is the least understood and the most significant area of audit risk.
Make sure you have a proven cost of goods sold (COGS) deduction strategy as it can be the difference from having a tax bill that's over 2x higher than it should be.
For proper guidance, we recommend that you remain up to date on the latest IRS court cases and hire a competent cannabis cost accountant to prevent you from paying more in taxes than you should.
Talk with your tax professional or contact us so that you can be sure certain that your COGS strategy is appropriate as different COGS rules apply to different business models (Resellers vs. Producers)
- Resellers generally may only include the invoice price of the cannabis sold less trade or other discounts, plus transportation as their COGS deduction
- Producers can deduct as a part of their COGS, the cost of raw materials and supplies, such as seeds, direct labor, and the allocated cost of indirect labor necessary for the production of the product.
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Tip # 4 - Expenses – Be prepared to not include many "write-off" you normally would take on your tree taxes.
The general rule is that all “non-cost of goods sold” expenses for a cannabis business won’t be deductible.
Many cannabis businesses pay federal income taxes on their gross marijuana income.
Still, they are some business models that are allowed to allocate and deduct a portion of their operating expenses as COGS. (See above)
It's essential to speak with a CPA who is well-versed in cannabis regulations to ensure you're doing everything possible to reduce your tax burden.
Generally speaking, outside of COGS, a cannabis business’s operating expenses are not deductible.
There are exceptions, but a case-by-case review of your specific details should be performed before the year-end.
Below are some commonly included items that most cannabis businesses track as expenses.
Keep in mind that many of the costs listed below may not be deductible expenses because of tax code 280E.
Commonly included expense line items:
- Bank charges & finance fees
- Commissions / fees
- Contract labor: Forms 1099-MISC and 1096
- Computer & internet expenses
- Health insurance, including premiums paid to cover the sole-proprietor and family and premiums paid on behalf of partners and S corporation shareholders
- Interest expense, including mortgage interest on a building owned by a business or business loan interest
- Meals & Entertainment
- Office supplies(pens, paper, staples, and other consumables)
- Mortgage interest or rent paid
- Homeowner's or renters insurance
- Rent expense (office space rent, vehicle lease expense for business vehicles, or other equipment leases
- Taxes / licenses
- Transportation and travel expenses
- Wages paid to employees: Form W-2 and W-3
- Federal and state payroll returns (Form 940, Form 941, etc.)
- Employee benefit expenses
- Other business-related expenses
Tip # 5 - Federal Taxes – Consider filing for an extension, while you work with a professional. It's better to get it right the first time.
Though cannabis is technically a Schedule I drug, cannabis operators are still responsible for filing a tax return with the IRS.
Remember that 280E dictates what you can and can't take as a deduction.
It’s important to file correctly, versus address and correct any issues during an audit.
Don’t be afraid to file an extension while your cannabis professionals plan.
We suggest working with a CPA firm that has the cannabis industry experience to make sure you're completing the right forms and taking the proper deductions.