It’s never been a better time to consider starting a marijuana business. In the United States, the most commonly used, federally illegal drug is marijuana. Approximately 48.2 million Americans have used marijuana at least once. 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 in value by 2024!
But before you start your marijuana business, you should understand how taxes will work.
Starting a Marijuana Business
While more than 30 states have already legalized marijuana, many vary in their classification of it. Thirty-six states have legalized cannabis products for medical use, while 18 states have legalized marijuana for recreational or nonmedical use. 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 can 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.
7 Tax-Related Things to Consider for a Marijuana Business
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. How Do Dispensaries Pay Federal Taxes?
Income from any source is subject to taxes, and generally, taxpayers must file a tax return to report this income to the IRS. Many marijuana businesses conduct transactions in cash, and like other forms of payment, these transactions need to be reported. Additionally, any business that receives a single cash transaction of more than $10,000 needs to file Form 8300 within 15 days of receiving payment.
Small business owners are typically required to make quarterly estimated tax payments. You can calculate your estimated tax payments by using Form 1040-ES. The easiest and fastest way to make estimated payments is via IRS Direct Pay.
To ensure your tax payments are accurate, keep good records to monitor your marijuana business’s progress and track deductible expenses. A good recordkeeping system will include a summary of each business transaction, which means it’s best to record your transactions daily. For more guidance on how to pay your marijuana business’s taxes, reach out to a Polston Tax attorney.
2. What Are Dispensary 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 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. Polston Tax can offer you further information on potential tax deductions for your business.
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 IRS tax code 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, your business will be taxed on its net revenue, and you will be unable to list expenses for carrying on operations as deductions. This setup can further reduce a company’s assets available for ongoing operating expenses. Reaching out to a tax attorney at Polston Tax and having us handle your taxes can simplify the process for you and ensure everything is handled correctly.
4. What If You Own 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 separately for these products, as it doesn’t fall under the same restrictions. This can avoid any potential confusion or legal issues.
The 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. But 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. At Polston Tax, we can help you navigate your business taxes and avoid heavy fines or other penalties.
5. Do You Need a 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 lack of coverage can put more of a strain on your marijuana business and make it more difficult to succeed. If you want help developing a contingency plan, reach out to a tax attorney at Polston Tax.
6. Will Your Business Be 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 at Polston Tax on everything tax-related. This can help you mitigate costs at the end of the tax year.
Learn More About Federal Taxes for a Marijuana Business
Understanding your marijuana business’s 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.
At Polston Tax, we offer cannabis tax planning and accounting services. We understand that tax laws can be challenging, so we’ll help you overcome any regulatory hurdles you’re facing. If you are considering taking the leap, then contact us at Polston Tax to learn more about necessary tax updates and news in the cannabis industry.
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