Tis the season for taxes. If you’re feeling frustrated, that’s okay. You’re not alone. In fact, handling taxes for your cannabis business is no easy feat. To jumpstart your successful tax season, our accounting experts have compiled a list of things you should know. Connect with your CPA as early as possible. Not every CPA will complete a tax return for someone in the cannabis industry due to the perceived risk and associated liability. Cannabis being federally illegal can be a huge hurdle for some providers, unfortunately and taxes will be due sooner than you were prepared for. Every tax season is a hectic time for tax preparers and tax rules constantly change. Being prepared as early as possible is the key to a successful file.
As a cannabis operator, particularly if you are more ‘green’ to the cannabis industry, taxes are a difficult subject and a big expense. As you prepare for filing with the CPA you hopefully connected with early (as early as yesterday, if possible), we have three areas to expand on to file successfully.
280E & Me
Understand the effects of 280E. 280E is an IRS tax code that allows only for deduction of the cost of goods sold (COGS). Make sure you’re talking to your CPA regarding your strategies for maximizing your COGS and covering truly everything that goes into your products. 280E has a colorful past, dating back to a case where in 1975 a coke dealer tried to write off his business expenses when he filed his taxes. You can read more about the story in this incredible Forbes article. The gist is that since a ruling in 1982, any operators who deal with Schedule I or Schedule II controlled substances cannot legally write business expenses off on taxes, meaning that all business expenses are truly just a paid expense on the operator’s behalf. Currently THC-infused products are classified as a Schedule I drug. Say goodbye to writing off business expenses such as marketing that mainstream operators can write off- cannabis is expensive and unforgiving. As the aforementioned Forbes article summarizes, “This tax code essentially makes cannabis companies pay taxes on gross revenue; a huge financial burden that makes it difficult to turn a profit”.
Finance & Friends
Understand your financial statements and be able to back them up. This is a good time to review year end budgets and expense line items with members of each division of the business. Even if you are working with an external CPA who is comfortable filing with cannabis, there may still be terminology or areas you will have to explore. Be prepared to hand over documentation, business line items, and overall operating expenses and sales and anticipate a larger discussion to ensure the CPA is aware of how everything functions. Perhaps pairing the CPA with an operational expert or internal points of contact may also expedite the process.
Plan for Payment
While this sentiment may be clearer in hindsight (as so much is), the payment for cannabis taxes is going to be hefty. In a fair statement, Boris Jordan who serves as a chairman for Curaleaf prompted operators to “imagine if your 38% federal tax rate was doubled”. Colorado chain Buddy Boy actually shuttered doors after eight years of serving their community due to owing nearly $500K in back taxes within just a few months. The tax bills are high, and the consequences are real. With that sobering example in mind, be ready to plan for payment. Cannabis is not a glamorous game- it is expensive. It is not for the faint of heart. It is for proactive planners with a razor-sharp sense of business acumen.
Fortunately, MJ Platform is here to help.
If you still have questions or concerns, contact the MJ Platform sales team and ask about our year-end tax services. We’ll identify inconsistencies in your MJ Platform reports, ensure your data is posting correctly to QuickBooks, understand your inventory, sales tax liability, and more. We’re here to help you deliver accurate year-end reports!
