This is the third blog in a series of posts discussing Section 280E of the federal tax code and how cannabis business owners can reduce their tax liability, taken from the recent MJ Platform webinar “280E and Tax Season” featuring Brian Cadieux, President of Cadieux and Associates, a Denver-based bookkeeping and tax preparation services firm.
As I shared in two previous blog posts about Section 280E, this federal tax code can present significant challenges to state-legal cannabis businesses, as cannabis business owners have to pay taxes on all their revenue without the ability to deduct business expenses to reduce their taxable income. This means individual cannabis business owners need to implement smart business structuring to maximize deductions.
In our third installment of this blog series, I will share insights on what businesses should do during tax and non-tax seasons so they are able to further reduce their cannabis business tax.
What should cannabis businesses do during the non-tax season?
To start, let’s take a look at what businesses should do during the non-tax season. The non-tax season is important, as this is the time to prepare for tax season and ensure the right processes are put into place to reduce business tax. During the non-tax season, cannabis businesses should do the following:
Contemporaneous Bookkeeping
According to the IRS, contemporaneous bookkeeping means records used to support a claim on a tax return are created and originated at the time the deduction is claimed. This is particularly important, especially with tax code 471, which provides general rules for determining the cost of goods sold as it relates to inventory and tracking inventory expenses. Wherever possible, business owners want to move expenses to the category of inventory as noted in section 471. In order to do this compliantly, cannabis business owners should ensure adjustments are made monthly, and expenses are properly documented to reap the most benefits when it comes to tax time.
Quarterly Estimates
If not designated as regular W2 employees, business owners are required to pay quarterly taxes. Taxes due have a specific due date each quarter. If an individual does not pay enough tax in one quarter, that individual could be charged with a penalty, even if he or she is owed a refund when filing end-of-year income tax. To ensure cannabis business owners are paying the right amount every quarter, they should speak with an accountant who can compute those figures for them, and individual business owners should also create income projections to help determine their quarterly payments.
What should cannabis businesses do during tax season?
Preparing properly during the non-tax season will have a big impact on what a cannabis business owner will pay during tax season, and during this time of the year, individuals need to know two important dates:
Important Tax Season Date: March 15
Partnerships and S Corps must issue their Schedules K-1 by March 15. Schedule K-1 reports each shareholder’s share of income, losses, deductions, and credits.
Important Tax Season Date: April 15
For sole proprietorships and LLCs, April 15 is the deadline to file individual tax returns.
For both filing dates, cannabis business owners can file for a 6-month extension, but it’s important to note that even though a tax return can be extended, the tax due related to the income is not. That means business owners must still pay what is owed on the deadline of either March 15 or April 15.
For more information on what to do during tax and non-tax season, view our recent “280E and Tax Season” webinar featuring Brian Cadieux of Cadieux and Associates, a Denver-based bookkeeping and tax preparation services firm. The webinar provides tips for cannabis business owners and accountants about how best to structure a cannabis business and manage expenses to reduce their tax liability.
In my next and final post of this series, I’ll share insights on how the MJ Platform can help cannabis business owners gain financial visibility and provide the accountability that they need.
Disclaimer: The opinions expressed in this blog post are those of the author. They do not purport to reflect the opinions or views of Akerna or its family of companies. The information contained in this post is provided for informational purposes only and should not be construed as tax advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this post without seeking tax or other professional advice.
