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Posted by Pat Raskob

Tax Tips for Your Cannabis Business

Tax Tips for Your Cannabis Business

A cannabis business can typically expect a series of scrutiny from the IRS that will want to penalize them if they are not compliant. Here are tips that can help your marijuana business for tax purposes:

  1. Know Your Business Accounting Method

What is the accounting method of your business: Cash? Accrual? What is the difference? We recommend that the cannabis business use the accrual accounting approach. 

While it is a complex approach, it comes with immense benefits for a marijuana business, which is above the complexity involved. The accrual method enables them to work with an experienced CPA to reduce their taxable income by boosting their COGS (Cost Of Goods Sold)

This comes down to knowing the pros and cons of each accounting method alongside the impact it can have on your taxable income.

  1. Know the General Rules that Bind Marijuana Sale

You have to pay taxes on all revenue from marijuana sales even though the federal law does not permit it. As a result, while the Federal Government disapproves of cannabis, you will be taxed on every penny you make if you do have a plan.  

The revenue will include all sales in the fiscal year for the accrual method, even if you do not receive a payment. 

For a business that operates with the cash accounting method, the revenue for the company will consist of items that you got the payment for. 

Here are items commonly included in the income:

  • Gross receipts

  • Allowances and returns

  • Interest from the business savings account 

  • Other income like rent that you realize from a non-cannabis related industry

  1. Be an expert in COGS (Cost of Goods Sold) for Marijuana Company or Hire an Expert.

Whenever there is an IRS audit, the auditors concentrate on COGS, yet it is the least understood term in the cannabis business. This makes it essential to have a proven cost and record of COGS deduction plan since it can save you from having an overly excessive tax bill. 

It is, however, essential to be up to date on the IRS court cases and work with an experienced accountant to help you reduce the overall taxes you will pay. 

  1. You Might not be able to Include a Series of "Write-offs."

As a rule, the entire expenses from "non-cost of goods sold" for a marijuana industry cannot be deducted. A lot of cannabis businesses do pay federal tax on their total income from the marijuana business. However, some businesses can allocate and deduct a part of their business operating expenses as COGS.

Make sure you are working with a reputable CPA to help you access every possible legal angle to bring down your tax burden.

Besides COGS. The operating expenses of a cannabis business cannot be deducted. While there are exceptions, one needs a detailed review of the business's specific details before the year-end. 

Here are a few everyday items that many cannabis businesses classify as expenses. Although the tax code 280E might not make many of these expenses deductibles:

  • Finance fees and bank charges

  • Fees and commissions

  • Advertising 

  • Internet and computer expenses

  • Contract labor

  • Insurance

  • Entertainment and meal

  • Interest expenses like mortgage interest on properties owned by the business

  • Utilities 

  • Renter’s insurance

  • Mortgage interest

  • License and taxes

  • Supplies

  • Maintenance

  • Travel expenses and transportation

  • Employee wages

  • Expenses for employee benefits 

  • Repairs

  • Business-related expenses

  1. Work with a tax professional and get an extension if need be 

Cannabis operators need to file a tax with Uncle Sam, even though it is classified as a Schedule 1 drug. As a result, you are better off working with a professional and requesting a filing extension if need be. It is better getting it right than making mistakes that will raise eyebrows. 

Make sure to consult the 26 U.S. Code Section 280e to know what you are permitted and cannot take as a deduction.



Pat Raskob
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