It may seem like there is still a lot of time until tax season arrives, but it will not take long for it to be looming over your head. If you run a business in the cannabis industry, it is always better to prepare ahead of time rather than being underprepared when the time comes.
The Internal Revenue Service (IRS) loves having a field day when it comes to all companies that have anything to do with the marijuana plant. Whether you run a dispensary, growing operation, cannabis-infused product manufacturing plant, marijuana concentrates, or any other business, the IRS will be keeping a close eye on you.
Entrepreneurs running cannabis businesses generate substantial tax revenues for the federal government, but they still have a higher chance of being audited by Uncle Sam than any standard business. When the tax season arrives, there are several aspects of the business that you need to track and be extra vigilant about.
Considering the complicated compliance procedures that cannabis businesses have to navigate and the hectic day-to-day operations, preparing for tax season can be overwhelming. Many cannabis businesses end up paying far more in taxes than they should. We are going to discuss how cannabis businesses can save money this tax season in this post to help you reduce your tax bill.
Understanding the IRS Code 280E
Before we look at the methods that you can use to reduce your company’s tax bill, we will take a look at IRS Code 280E – the reason taxes can be such a problem for a business like yours. 280E is a federal statute that prohibits companies from deducting business expenses for income associated with trafficking Schedule I or II substances.
While many states have effectively legalized cannabis in some form or the other, the federal government still considers it as a Schedule I substance. Unfortunately, it means that businesses in the industry have a much tougher time navigating their taxes.
The federal statute was created in 1982 by the Reagan administration due to a court case. It saw a convicted cocaine trafficker assert his right under federal tax law to deduct ordinary business expenses. The Reagan administration decided that this was going to become a problem if other drug traffickers began to do the same thing and created 280E to prevent it from happening again.
280E is still in effect and applies to Cannabis businesses even if they comply with state law and are regulated. Most businesses can deduct various things like rent, equipment, electricity, and employee salary expenses on their tax returns. However, cannabis businesses can only deduct expenses directly related to making profits or the cost of goods sold (COGs). It means that cannabis companies end up paying taxes on gross income – pushing tax bills as high as 70%.
Proper tax preparation and documentation can help cannabis businesses avoid such hefty tax bills and innumerable tax penalties.
3 Ways Cannabis Businesses Can Save Money This Tax Season
Determining your tax liability, finding deductions, and avoiding audits can help your business save money. A company’s tax liability is what it owes the federal government after deductions. Working with the right tax professional can help your cannabis business significantly reduce tax liability when tax season arrives.
Here are some of the most common ways cannabis businesses can save money this tax season.
1. Pay attention to the flood plan
As a cannabis business owner, you should pay more attention to your company’s floor plan. It can help you make sure that you make the right deductions and avoid getting audited by the IRS. Suppose that 60% of your floor plan comprises the sales floor and 40% is the lobby.
Since 60% of your business is directly related to the GOGs, you can deduct 60% of your rent from the tax bill. Deducting 100% of your rent from the tax bill can result in a penalty because there are no cannabis transactions happening in the lobby.
Similar principles apply to utilities and other aspects of the business. Working closely with a tax professional skilled with cannabis-related laws can help you navigate these tricky tax deductions to minimize your tax bill without landing you in trouble with Uncle Sam.
2. Proper employee classification
The IRS keeps payrolls under a microscope, and you need to ensure that you are classifying all your employees accurately, based on the role they play. You must document what each of your employees does for the business. Suppose you have an employee who works part-time as a cultivator and the remainder of the time as a budtender.
The time that the employee spends as a cultivator is deductible, but the time they spend as a budtender is not included in COGs. You need to be careful of how you classify your employees while considering your tax deductions. 280E gets into the nitty-gritty details, and you cannot make any slip-ups.
3. Maintain an impeccable record
All businesses must maintain a good record. Cannabis businesses have to keep an impeccable paper trail. This helps tax professionals identify any tax deductions, with supporting numbers, if there is an audit. Working with an experienced tax professional can help you improve your record-keeping to ensure an impeccable record.
Tax Attorneys to Help Your Marijuana Business in Tax Season
Tax season is not easy for any business. When it comes to running a cannabis-related company, things only get more complicated. Navigating the nuances and complexities of 280E is not easy for many people. Fortunately, you can hire the help of someone who understands all the regulations like the back of their hand. At Polston Tax, we are the tax attorneys to help your marijuana business save money this tax season and avoid issues with the IRS by keeping your business compliant.
Licensed to practice in all 50 states as tax attorneys, we have hundreds of professionals in our firm, specializing in all areas of the tax industry. We’re more than well-equipped to handle your marijuana business’ tax matters and provide you with all the help you need.
Contact us today to get your marijuana business the tax help it needs so you can focus on growing your business without worrying about compliance and tax issues.