The cannabis industry is on the brink of a revolution as marijuana legalization promises to change the economic landscape forever. Cannabis business owners are on the vanguard of the biggest boom since oil, but only if they mind the taxes. While profitable, the industry is one of the most taxed in the country. Federal law treats marijuana companies as illegal, subjecting them to strict rules and high taxes. Companies are thoroughly scrutinized, sometimes more than other businesses.
These factors, combined with the complex and ever-changing state tax laws, make it crucial to partner with a tax resolution attorney. Tax attorneys may not be the first thing you think of regarding a cannabis business, but they can help. They can assist in tax preparation, compliance assurance and risk management. Tax resolution attorneys can also provide representation and audit defense services when needed.
While the recent wave of marijuana legalization has many entrepreneurs seeing green, there’s the unique problem of marijuana taxes to consider. So, what’s the big deal with a business that deals in marijuana? You’re running a business, so you’ll pay taxes just like any other business, right? Wrong!
Marijuana businesses must pay extra attention to taxes because of the Internal Revenue Code section 280E, also known as the federal tax code 280E. The federal tax code 280E has brought more than a few would-be marijuana enterprises to their knees. In a nutshell, it says that any business dealing in a scheduled substance cannot have common tax write-offs, like payroll and rent.
The law hearkens back to the 1980s when drug kingpins used businesses as fronts to launder drug money. Tax code 280E was a tool the feds could use to financially cripple drug dealers by denying their faux companies vital tax deductions. Currently, 24 states, plus the District of Columbia, have legalized cannabis for recreational use. Another 14 states allow cannabis use for medicinal purposes only. Yet, it’s still a scheduled substance according to federal law. And since a cannabis business is technically dealing in an illegal substance, it must answer to the 280E tax code.
To say that 280E has been a thorn in the side of cannabis businesses is an understatement. 280E has decimated many companies struggling to get off the ground. To appreciate the law’s gravity, let’s consider an example.
Two companies, one a cannabis company and the other a non-cannabis company, both earn gross revenue of $1 million for the tax year. Thanks to the cost of goods sold (COGS) exception, both cannabis and non-cannabis businesses can write off $600,000. This leaves a gross income of $400,000. Now, let’s factor in the typical business deductions.
The non-cannabis company can write off expenses like office rent, payroll and phone, plus a dozen other operational costs. These expenses bring down their tax rate significantly. Let’s assume the non-cannabis company has $200,000 in deductions while the cannabis company can write off nothing, thanks to 280E. Since the non-cannabis company’s gross income is half of the cannabis company’s, they will pay about half as much in taxes, depending on the tax rate in their location.
In many cases, a marijuana company can pay more than twice the tax rate of other businesses.
In summary, here are a few of the typical expenses a cannabis company cannot deduct:
Here is a sampling of COGS expenses that a cannabis company can still deduct:
Understanding what you can and cannot write off requires professional help. Small enterprises should be able to profit from the significant marijuana movement but often fail because of insufficient tax preparation. At Polston, we can help you navigate 280E limitations, as well as help you implement processes that will ensure you don’t pay a penny more to the taxman than you need to.
There is one aspect of 280E that has been the saving grace of marijuana businesses. Cannabis businesses can still write off COGS. COGS are expenses related to the production and distribution of the goods you sell. For example, costs for producing cannabis might include anything involved in growing or moving your product. This can consist of grow house and transportation expenses.
If you want to know how to get into the marijuana industry, start getting good at recording everything—every expense, no exceptions. When tax season arrives, or it’s time to face legal action from the IRS, you’ll want as many expense records as possible.
At this point, you may be thinking, what does this have to do with a tax resolution attorney? A good tax attorney, especially one familiar with the cannabis industry, can help you navigate the challenges you face under 280E. At Polston, we have attorneys with experience in your industry. We can help you with your marijuana business accounting and tax planning.
While it is essential to understand how 280E affects your marijuana business, it’s not your only tax hurdle. Whether you’re already in the company or you are looking at how to get into the marijuana industry, here are some other challenges you need to consider:
Using a tax resolutions attorney for your tax cannabis business can be beneficial for several reasons:
Tax resolution attorneys with experience in the cannabis industry know the federal and state tax laws and regulations. They can help you understand your tax obligations and ensure your business complies. Adhering to tax laws eliminates costs like penalties and interest and prevents collection actions that could harm your business.
Tax planning is crucial if you own a cannabis business. You pay more taxes than other businesses because of the federal tax code 280E. The law prevents you from deducting ordinary business taxes, increasing your tax liability. However, you may be able to take other deductions to pay less in taxes.
Tax implications may also depend on how you manage your business and assets. Tax resolution attorneys can provide valuable insights and help you avoid taxes. These strategies can save money while ensuring compliance. If you’re behind on paying your taxes, other techniques like offers in compromise, installment agreements and penalty abatements can help resolve delinquencies.
Cannabis tax lawyers can help ensure your business complies with the tax laws. They can review your tax filings, financial records and business operations to identify potential violations and take proactive steps to address them. Involving cannabis tax lawyers in your business can prevent costly penalties and legal issues.
Cannabis tax lawyers can evaluate and mitigate the tax-related risks impacting your business. They can conduct risk assessments and provide tailored tax planning and compliance advice. These services reduce the likelihood of financial and reputational damages and stabilize your business.
The IRS often scrutinizes cannabis businesses more closely than others. In addition to the stricter laws, cannabis businesses face more audits and other tax-related issues than most other businesses. Partnering with experienced tax attorneys to represent you when dealing with the IRS and state tax entities is crucial. Cannabis tax lawyers can handle the tax authorities’ aggressive tactics, leveraging their experience and knowledge of the law. They can also negotiate settlements and resolve disputes effectively.
Marijuana business taxes are among the strictest and harshest in the country. Many cannabis companies face financial challenges because of these laws. The good news is you can navigate these challenges with a bit of help. Accountants and tax attorneys can help ensure compliance, reduce your tax liability legally and prepare for audits. If you’re behind on your tax payments, leveraging solutions like installment payments, offers in compromise and penalty abatements can also be beneficial. With such a daunting road ahead, you’ll need help from a tax resolution attorney.
Polston Tax is a leading tax resolution and account firm with years of experience in the industry. We help cannabis businesses develop and implement practical solutions to deal with regulatory challenges. Do you need legal or accounting services for your cannabis business? Contact us today to talk to a cannabis tax professional!
