It’s never been a better time to consider starting a marijuana business. More than 55 million adults in the U.S. use marijuana and over half have tried it.
With new laws getting passed, the legalization of marijuana across the country is within reach. The global legal cannabis market is projected to reach 63 billion dollars in value by 2024!
Thinking about starting a marijuana business? If so, there may be aspects of your accounting that you haven’t thought of. Learn everything you should consider when it comes to taxes and your marijuana business.
1. Starting a Marijuana Business
While as many as 30 states have already legalized marijuana, many vary in their classification of it. The greatest hurdle remains that the federal government still considers cannabis an illegal controlled substance.
That means your business may not be eligible for all the tax deductions that other businesses might qualify for. Usually, a company is able to deduct the necessary expenses paid or incurred during the taxable year to help minimize taxes owed.
If you’re already starting to get confused, don’t worry! We can provide you with the guidance you need to stay safe and within the law.
2. Tax Deductions
The Internal Revenue Code (IRC) Section 280E states that tax-deductible expenses are only allowed towards the cost of goods sold using the full absorption inventory method. This can affect producers, growers, and/or inventory costs for businesses that are involved in the trafficking of illegal substances like marijuana.
That means your marijuana business won’t qualify for certain federal tax deductions resulting in steep operating costs. Plus, there are some clear legal risks at the federal level.
Despite the possible risks, many business entrepreneurs are willing to move forward with their marijuana businesses. The projected legalization in all 50 states, as well as the growth potential, has outweighed any fear of retribution by the government.
3. What is Deductible?
Your marijuana business will benefit from having professional assistance when it comes to tax time. It’s important to know what you can write-off and what is off-limits.
Under Section 280E, anything not considered the cost of goods sold that are related specifically to a cannabis business is non-deductible. This includes things like your advertising, business insurance, back office, rent, professional fees, and fringe benefits for sales employees.
Therefore, not only will your business be taxed on its net revenue but you will be unable to list expenses for carrying on operations as deductions. This set up can further reduce a company’s assets available for ongoing operating expenses.
4. Multiple Businesses
There are many avenues that your marijuana business can take. For example, you can be a grower, distributor, or retailer. If you want to sell CBD as well, it’s advised to file your taxes separate for these products as it doesn’t fall under the same restrictions. This can avoid any potential confusion or legal issues.
Cannabidiol (CBD) industry is considered a legal business according to the federal government. This is acceptable for tax deductions under federal law. So you could sell these hemp-derived products without the same federal scrutiny.
Yet, bear in mind that if you are conducting both businesses you will need to show adequate documentation on each one. You will need to keep accurate records that show how operations are separate for each business to allow filing deductions for one.
This means maintaining separate books and records. Otherwise, you could be at risk for investigation by the federal government. This could result in heavy fines or bankruptcy.
5. Contingency Plan
For any business, it’s important to have a contingency plan should anything go wrong. This includes bankruptcy. However, for the marijuana business, it’s far more difficult to recover losses since insurance companies are unwilling to cover them.
This is because marijuana is still considered illegal by the federal government. The insurance companies that are willing to offer coverage have also raised their premiums for these types of businesses, making them far more expensive than what other businesses owe.
This can put more of a strain on your marijuana business and make it more difficult to succeed.
6. Investors Beware
If you’re not considering starting your own business but want to become a partner or invest in one, you should also be aware of all aspects of the company.
If you plan on investing in one of these types of businesses, you should do some research to learn all of the company’s revenue-generating products. If they are selling multiple products, are they keeping their records separate and filing them legally with the IRS?
Make sure you are investing in a company that has prior experience and leadership in the industry. This is important with new businesses that are just getting started in the cannabis industry.
Also, it’s worth noting that because selling marijuana is still considered illegal by the federal government, any of these businesses could get shut down at a moment’s notice. That could mean instant bankruptcy for any marijuana business.
7. Going Public
Are you expecting to eventually go public with your marijuana business? Then C-corporation is often the best option. This can also trigger some tax changes including a taxable event upon the stock sale or dividend distribution.
Pass-through entities will pay tax for their share whether or not it gets distributed. Keep in mind that each state has a different method for taxation of a marijuana business.
This can make a difference when it comes to filing your taxes. Before diving into the creation of your business, you should consult with the experts on everything tax-related. This can help you mitigate costs at the end of the tax year.
Get In the Marijuana Game
Understanding your business’ potential challenges is all a part of the process of getting started. The legalization of marijuana still seems to be on the horizon, which could result in further changes to the tax deductions for these businesses.
With this high earning potential, it could be the greatest time to be at the forefront of starting a marijuana business. If you are considering taking the leap, then check our site to learn more about necessary tax updates and news in the cannabis industry.