A new year means a new round of The Tax Man Cometh. To those who are seasoned in this aspect of the cannabis industry, here is the latest published information. Those who are new to the industry, welcome and buckle up! The list of tax-deductible cannabis business expenses is much more prohibitive than not and should be considered when tallying necessary finances to start a cannabis business. Further, the Internal Revenue Service (IRS) has openly admitted specifically looking for errors in taxes submitted by cannabis businesses. If you’ve put up money to start a cannabis business or invested in a cost of your cannabis business, it’s time to get ready for the upcoming season! Please note the information contained within this article is provided only for informational purposes, and is not intended to and must not be taken as a substitute for obtaining accounting, tax, legal or other expert advice from a tax professional.
280E Tax Code
The ultimate nemesis of any cannabis business is the 280E Tax Code, which prevents a business that handles Schedule I or Schedule II-restricted substances from deducting business expenses. The better news, however, is deductions are permitted for expenses directly tied to the cost of the production of goods (COGS). A smart mitigation many in the industry utilize is legally splitting the business in half, and running two entities, carefully and considerately, under the same roof. The first business handles business expenses such as storage, and the cost of building rent or ownership, as well as maintenance, employee benefits, and company events. Under this first business, non-cannabis products can be sold. The second business is directly connected to cannabis, including growing, curing, packaging and distribution. Within these two business models, the second business exhibits minimal overhead as the majority of expenses are composed of inventory. These expenses can, therefore, be included in the legally-allowed COGS-related deductions.
Additional examples of deductions that related to money to start a cannabis business that can be claimed by the first business are:
- Salaries and contract labor
- Professional fees
- Licenses and fees
Some examples of deductions that can be claimed by the second business are:
- The invoice price for cannabis, less trade or other discounts.
- Electric bills for designated inventory areas (electricity used in any sales area is not deductible).
- Transportation: The cost of travel to purchase and legal shipping costs.
Cannabis Business Expenses and Deductions
De Lon Harris, Commissioner of Examination at the IRS Small Business/Self Employed (SB/SE) Division, spoke about tax-related issues in state-legal cannabis markets in a webinar published on December 8, 2021 by PBC Conference. He said that while cannabis remains federally illegal, businesses that deal in controlled substances must still file federal taxes, and the IRS is not turning a blind eye to those seeking assistance. “Regarding the cannabis marijuana industry, we developed a strategy that we hope will increase voluntary compliance and identify and address non-compliance when it’s there. Our focus is to positively impact filing and paying and reporting compliance on the part of all cannabis businesses to keep audits to a minimum.” Part of the IRS strategy involves training revenue officers and examiners “so that they can come to conduct an examination that is a quality one” and also “providing our examiners with the job aids to facilitate quality examinations.”
Harris also explained while cannabis companies can’t make conventional tax deductions on the cost of their cannabis business or receive credits because of tax statute 280E, that “doesn’t prohibit the participant in the marijuana industry to reduce their gross receipts by properly calculating the cost of goods sold.” This kind of information is also available on the IRS website, the official said, though he noted, for now, people need to search “marijuana,” rather than “cannabis,” to find what they need. This stipulation, however, is in the process of changing, Harris said, due to industry-wide terminology preference.
Cost of Cannabis Business Deductions
Regarding tax deductions for cannabis businesses on the state level, not many laws exist that allow for credits. Some states such as Colorado and California have existing allowances for any type of cannabis business to take a deduction on state taxes for ordinary and necessary business expenses via a state adjustment. For those who are operating in the state of New York, the Senate is working on pushing through S7518, which allows for state-level commercial cannabis tax deductions. Unfortunately for Missouri, similar legislation was recently vetoed by the Governor. Overall, considering both potential state and federal taxes is an important part of calculating the cost of the cannabis business.
Saving up money to start a cannabis business? Changing up the costs of yours? Just want to find out the latest info on the industry? Keep informed on profitable business practices via CannaCon news and business-to-business conferences. Upcoming in early January is the Northeast event on the 7th and 8th. The goal of CannaCon is to grow the cannabis industry by educating cannabis business owners on all things related to cannabis and CBD. Their safely-run trade shows feature a large exhibition hall with exhibitors from around the country as well as seminars delivered by industry experts. Sign up today!