Since marijuana is becoming legalized in many states, more businesses are emerging to serve these new markets legally.
If you’re a new marijuana company, you’re about to enter your first tax season. This is going to be much different than what you’ve experienced in doing taxes before.
Read on to learn about marijuana taxes and how you can file your taxes the right way this year.
1. Gather Your Documents
Your first step in doing your taxes is to get your documentation together. You have to prove your income and expenses from the year.
Your receipts for business expenses, payroll records, taxes paid during the course of the year, and financial statements are all required to do your marijuana taxes.
2. Send Out 1099-MISC and W-2 Forms
Did you work with employees or independent contractors during the year? If you did, there’s an additional step that you need to take.
By January 31, you need to submit your 1099-MISC and W-2 forms to the IRS and to your contractors or employees.
Contractors who were paid more than $600 during the year should receive a 1099-MISC. This documents the total amount they were paid during the year.
A W-2 form is created for your employees. This documents how much they were paid, how much state and federal taxes were withheld, and any contributions to a health savings or retirement plan. The W-2 reflects these amounts for the entire year.
It’s important not to skip this step or take care of it in February. The IRS takes this seriously and you could be subject to fines and penalties for filing late.
3. Calculate Your Business Income
If you kept good records during the year, it should be easy to calculate your business income for the year. You should have detailed records of your sales and business income.
This total is going to be the foundation of your taxes. To document your gross receipts, you should have records of cash register receipts, bank deposit receipts, books that document receipts, and credit card slips.
4. Understand Your Deductions
Doing your taxes as a cannabis business is much different than doing taxes for any other type of business.
The reason why is because marijuana businesses don’t have the same business deductions as all other businesses.
Most businesses can deduct “all ordinary and necessary expenses paid or incurred during the tax year,” as written in the Internal Revenue Code 162(a).
This can include anything and everything from office supplies, inventory, and equipment.
Marijuana businesses are subject to Internal Revenue Code 280E, which was made part of the code in the early 1980s. If your business sells a drug that is classified as a Schedule I or Schedule II drug, you are not able to claim business tax deductions under Internal Revenue Code 162(a).
In other words, you don’t get to write off a lot of your business deductions. The only business deduction that you can claim is for the cost of goods sold, which are covered in the Internal Revenue Code sections 471 and 263(a).
5. Calculate the Cost of Goods Sold
This is going to be the most important part of your tax return because this is your one chance to lower your tax obligation. It’s important to make sure that this is calculated accurately.
How COGS is calculated will depend on your business. If you’re a marijuana grower, you have certain direct and indirect expenses that you can deduct. The expenses that you can deduct as a dispensary are going to be much different.
6. State and Local Taxes
Not only do you have to contend with the world of federal taxes, but you have to sort through state and local taxes as well.
Your state tax obligations are going to vary depending on your location and type of business. To add to the confusion, state laws are changing often as they adapt to marijuana being legalized..
7. Keep Impeccable Records
The IRS requires that you maintain records for about 7 years. The IRS can audit your business for this tax year for the next 6-7 years, so it’s very important to maintain those records and keep them in a safe place.
What kind of records should you keep? Just about everything. Employee records, taxes, inventory records, and any record that has to do with the operations or the finances of your business.
8. Act as if You’ll Get Audited
The best protection of your business is to act as if you’ll get audited. Cannabis businesses are audited at a higher percentage than any other business. That’s because many businesses operate as a cash business and the IRS wants to make sure that every dollar is properly accounted for.
When you expect to get audited, you approach your tax obligations differently. You track everything and keep good records. You won’t try to sneak in a couple of deductions, hoping that no one will notice.
9. Hire Professionals
You are ultimately responsible for filing correct taxes for your cannabis business. You can’t respond to the IRS or a tax court judge by saying you just didn’t know about a certain law or regulation.
That won’t help your cause at all. Taxes are very complicated for businesses as it is. For a cannabis business, the world of taxes is even more complicated.
You have to do what’s best for your business, and oftentimes, that means working with a tax professional that knows federal and state tax laws.
Understanding Marijuana Taxes
Taxes are a part of doing business. For cannabis businesses, navigating marijuana taxes is daunting. You have a much higher tax responsibility than other businesses. Your business is also under a lot more scrutiny by tax authorities.
You should educate yourself about your tax obligations so you understand what’s at stake and how your business is affected.
When it comes to filing marijuana taxes for your business, you should lean on an experienced team of professionals for help. Contact us today for a consultation.
More On Cannabis CPA Accounting & Tax Services
The cannabis industry has exploded in recent years. It’s quickly become the wild west with companies looking to get in on the ground floor of this industry. While the laws around cannabis are changing fast, and there are a lot of financial issues that are murky at best. While many states are legalizing marijuana on...
Cannabis tax brings in hundreds of millions of dollars in state revenue each year, but at what cost to the booming marijuana industry. A complex taxation system may be a money-maker for the state, but it makes business difficult and the price of cannabis high for consumers. Since the legalization of cannabis is still in...
We are on the brink of a revolution. Marijuana legalization promises to change the economic landscape forever. You are wise to be on the vanguard of the biggest boom since oil. But only if you mind your taxes! A tax resolution attorney may not be the first thing you think of when it comes to...
Did you know that the largest legalized cannabis market in the world is North America? This region accounts for almost all cannabis sold around the world, and the market is still growing. If you’re in the cannabis industry, you know that it can be a tricky business to navigate. With constantly shifting regulations and laws,...
The legal marijuana market has projections of $91 billion by 2027. If you are thinking about jumping onto the marijuana bandwagon but aren’t sure about marijuana tax or what the difference is between marijuana and cannabis tax, read on. We are going to fill you in on federal and state taxes. Plus you’ll know the...