Congratulations! You are on the vanguard of a boomtime industry.
As a medical cannabis producer, you are producing a valuable alternative medicine for people who desperately need it. You are also ready to make the shift to recreational once the law allows. Of the many challenges you face, medical marijuana tax law is most critical for your business’ longevity.
Quicksand and The Pot of Gold
You’ve found the pot of gold at the end of the rainbow, and it’s sitting on quicksand.
In quicksand, you must move slowly and methodically. Hasty movements only get you more stuck.
Such is life for every marijuana business. The quicksand is cannabis tax law. Underestimating it has put many would-be entrepreneurs out of business before they could even begin.
The catch? Your operation may be legal in your state. But marijuana is still a controlled substance in the eyes of the feds.
You knew this already.
You may not know how this sticky position can affect you come tax season. That’s where we come in. The seasoned professionals at Polston Tax Resolution and Accounting will guide you to success by handling your cannabis business taxes the right way.
But the first step begins with you. As a business, estimating your taxes accurately gives you a leg up come tax season. This guide is everything you need to know to get started.
Medical Marijuana Tax: The Perils of Being Legal-Not-Legal
First, some context. Every cannabis producer should know about a little section of the tax law known as 280E. In a nutshell, it states that no business dealing in a controlled substance is entitled to any type of write-off. No deductions, no credits.
Most fledgling businesses stay afloat because they can write off expenses. Rent, supplies, etc. are costs that lower tax liability. The fed allows this for every other type of industry.
But not for the cannabis industry.
Marijuana taxation is steep. The lack of expense deductions means marijuana businesses pay significantly higher taxes.
Is this some sort of social penalty for dealing in drugs? Perhaps. But only Congress can change this law, and until that happens, this is your reality.
There is no way around paying these steep taxes. But there is a way to mitigate the damage so that you can do business legitimately and thrive.
How Cannabis Tax Law Isn’t A Complete Buzzkill For Your Business
While 280E seems like a death knell for the average cannabis start-up, there are some expenses you can write off. Much of this depends on your type of marijuana business.
More Deductions Exist For Producers Than For Retailers
If your cannabis business is on the production side, you’re in a better position. You can expense deductions as costs of goods sold (COGS). This tiny caveat of 280E means producers can write off any expenses involved with seeding, cultivation, and transportation of their cannabis crop. Score one for the growers!
An Option for Retailers
For a cannabis business involved with distribution or retail, there are still some options. Any company that “touches the leaf” receives the 280E treatment. So many have tried opening an associated business that doesn’t deal directly in the bud itself.
Thanks to the CHAMP (California Helping to Alleviate Medical Problems) ruling from 2007, non-producing cannabis businesses who can’t expense out COGS, can operate an affiliate business. This business can benefit from expense deductions, just like any other business.
This adjacent business can take many forms. For example, one might open a retail store for merchandise, or a yoga or wellness studio next door.
Another example cited in the CHAMP ruling is building ownership. As a retail operator, you might also own the building. In this case, you can separate your role as a landlord/property manager from the marijuana business.
Reaping the tax benefits from this affiliate business has no doubt helped producers and distributors save serious cash.
All this might come to an end soon, though. Recent court rulings suggest that even these ancillary businesses can be subject to the 280E straightjacket. If the taxman can prove the second business benefited directly from the sale of marijuana, then unfortunately, its no tax break for you!
Medical Marijuana Tax Time Essentials
The nature of the cannabis business in the United States means the IRS will hold you to a higher standard. You will be scrutinized more closely, so your recordkeeping must be nothing less than impeccable.
Here is what needs your absolute attention to get you ready for tax season.
Record Every Transaction
Record everything, especially every sale.
Because of marijuana’s standing with the feds, banking is a notorious challenge for your industry. As a result, you likely deal in a lot of cash. The IRS knows this, and it smells the probability of unreported income.
To the taxman, even worse than writing off unjustified expenses is not reporting income. It’s a federal offense. So keep immaculate sales receipts. For a retailer, this means not letting a single cash sale slip through. For a distributor, this means filing IRS form 8300 for every customer purchasing $10,000 or more.
Document Every Expense
Even though 280E can feel like suffocation for a marijuana business. Even though opportunities for tax breaks seem to dwindle year after year, you should still record all of your expenses.
It’s a vital practice for any business, and necessary if you want to have an accurate balance sheet. So don’t poopoo documenting an expense simply because of 280E. You may be overlooking a cost that can count as a COGS.
So record it all and let your accountant sort it out.
Document Employee Tasks
This detail is lesser-known but still important to document. It applies specifically to dual entities.
For example, say your company produces and retails cannabis. Many of your employees may wear a few different hats. Maybe an employee spends part of the day in the greenhouse or on the farm cultivating, then moves on to bud tending at the store. The time spent in cultivation can count as a COGS expense. Not insignificant, and not something you’d want to miss.
Know Your State Tax Rate
Most states have an excise tax, in addition to sales tax. Make sure you are taking all of this into consideration when estimating your state taxes too. You are only legal because of your state, after all.
With Our Help You Can Thrive
Under planning is not an option when it comes to medical marijuana taxes. It can be perilous. At Polston Tax Resolution and Accounting, we will navigate you through this quicksand so you can reap the benefits of all your hard work so you can enjoy that pot of gold.