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 a cannabis business, but they can be a big help. Learn more below!
The Unique Challenges of Marijuana Taxes
While the recent wave of marijuana legalization has many an entrepreneur 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’re going to pay taxes just like any other business would, right?
The reason a marijuana business needs to pay extra special attention to taxes is because of a little law known as 280-E.
This section of the IRS code 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. 280E was a tool the feds could use to financially cripple drug dealers by denying their faux companies vital tax deductions.
There is legal cannabis in ten states, but 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.
COGS for a Marijuana Business
There is one aspect of 280E that has been the saving grace of marijuana businesses.
You can still write off the costs of goods sold or 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 growhouse and transportation expenses.
If you want to know how to get into the marijuana industry, heed this piece of advice:
Start getting good at recording everything: every expense, no exceptions. When tax season arrives or when 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 all of 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 who specialize in your industry. We can help you with your marijuana business accounting and tax planning.
The Real Cost of 280E: A Tale of Two Companies
To say that 280E has been a thorn in the side of cannabis businesses is an understatement.
280E has decimated many businesses struggling to get off the ground.
To appreciate the law’s gravity, take the following example:
Two companies, one a cannabis company, and the other a non-cannabis company, both earn gross revenue of one million dollars for the tax year.
Thanks to the COGS exception, both cannabis and non-cannabis businesses can write off 600K.
This leaves a gross income of 400k.
Now, let’s factor in the typical business deductions.
The non-cannabis company can write off expenses like office rent, payroll, phone, plus a dozen other operational costs.
These expenses bring down their tax rate significantly. Let’s pretend the non-cannabis company has 200k in deductions, while the cannabis company can write off exactly NOTHING, thanks to 280E.
The non-cannabis company will pay around 60k in taxes, while the cannabis company will pay 120k.
The effective tax rate the cannabis company pays is twice as high in this example. And this just a pretend scenario. In reality, 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:
- Rent for a retail office
- Payroll for store employees
And here is a sampling of COGS expenses that a cannabis company can still deduct.
- The cost of building and maintaining a grow house
- Transportation and storage costs
- Payroll costs for employees who are involved in the growing and storage (but not the retail) process
Understanding what you can and cannot write off requires professional help. Small enterprises should be able to profit off of the big marijuana movement but often fail because of insufficient tax preparation.
At Polston, we can help you navigate 280E expenses, as well as help you implement processes that will ensure you don’t pay a penny more to the taxman than you need to.
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 business, or you are looking at how to get into the marijuana industry, here are some other challenges you need to consider.
State Marijuana Taxes
How will your state tax cannabis? Of the ten states who have already legalized recreational use, only one–Alaska–doesn’t apply an extra tax above and beyond ordinary sales tax.
All of the other states apply some form of excise tax, which is around 15%-20% on average.
If you are purchasing equipment from another state, or if you purchase a product from a different state, use tax might come in to play.
Use tax is the tax you pay another state for the privilege of doing business there. Use tax typically applies to large purchases, but you may find your company needs to operate across state lines.
You Need a Tax Resolution Attorney
As you can see, marijuana taxes are no joke. You might find yourself in over your head, even before your business becomes profitable.
With such a daunting road ahead, you’ll need help from a tax resolution attorney. Contact us at Polston today to talk to a cannabis tax professional.
More On Cannabis CPA Accounting & Tax Services
Running a legitimate cannabis business can be tricky, especially since cannabis is still illegal on a federal level in the U.S. There are 36 states plus the District of Columbia where recreational and/or medical cannabis is legal. The cannabis industry is worth $61 billion in the United States, with sales increasing 67% in 2020. Operating...
A 2019 study estimated that there were 340,000 jobs in the marijuana industry in the United States. This number reflects the growing social and legal acceptance of the plant. If you own one of the businesses providing these jobs, you’re part of one of the fastest-growing industries on the planet. However, every business has its...
If there’s anything certain in life, it’s death and taxes. Even with the ever-growing and profitable Cannabis industry, there’s one thing that makes taxes feel like death—and that’s the 280E tax code. If you’re a budding entrepreneur coming up in the cannabis business, you’ll want to learn everything you can about 280E and more. You...
It may seem like there is still a lot of time until tax season arrives, but it will not take long for it to be looming over your head. If you run a business in the cannabis industry, it is always better to prepare ahead of time rather than being underprepared when the time comes....
Reports reveal that the IRS is once again ramping up audits on cannabis businesses. After the lull during covid-19, the IRS is on a mission to ensure that cannabis businesses are adhering to the tax codes. Unfortunately, cannabis companies are subject to more stringent taxation than other businesses and can claim fewer deductions. A lot...