As a cannabis business owner, what would you say your toughest hurdle to overcome?
Is it finding supply? Likely not.
How about filling your business with customers? Doubt it.
Chances are, you’re battling with the same issues others in this industry are struggling with…
And lots of ’em.
Although marijuana is legalized by many states, they didn’t make it easy to be a dispensary owner. For one, you’re stuck paying ridiculously high tax bills.
In many cases, it’s double that of what businesses pay in other industries.
Thankfully, you don’t have to put up with this for much longer. There are ways around these tax hikes, which we’ll cover below.
We’re going to discuss several tax strategies you can use to reduce what you owe to Uncle Sam.
But first, let’s examine the root of your tax woes.
A Brief Overview of Tax Codes 280e & 471
If you’ve been in business for more than a year, then odds are you’ve heard of tax code 280e. It was introduced (and passed) to prevent street drug dealers from claiming tax deductions for business expenses.
So it’s explicitly designed for state-legal cannabis businesses only. But because of its implementation, cannabis business owners are subject to federal tax rates at a whopping 40% to 80% (compared to 21% for other corporations).
There are also fewer deductions available, which increases taxable income. In other words, less money to cover pay raises, business expansions, and building improvements.
This tax code affects cannabis businesses in the following categories:
- Retail dispensary
- Processing, extractions, infusions
- Those licensed in every area of cannabis (growing, producing, and selling)
Even if you’re a wholesaler to retailers, you’re still subject to taxation (this is considered trafficking).
Unfortunately, this isn’t the only tax code chasing down your profits.
Tax Code 471
The purpose of this tax code is to identify what’s considered inventory costs. If the item counts, then it’s considered a COGS (cost of goods sold).
So the more COGS you have, the more you can deduct from your tax burden. It can be tricky calculating this without a licensed accountant, so be wary of attempting to do this on your own. If you’re not careful, you could end up paying thousands (or even millions) of dollars in tax payments.
Also, those randomly assigning COGS are at risk of being penalized by the IRS.
Now, what can you do to mitigate the financial risks associated with these tax codes?
1. Understand What COGS Are (& Deduct Them)
The first step is to familiarize yourself with what COGS are under these tax codes. This way, you can deduct them from your taxes and owe less money to the feds.
For instance, under 280e, you can deduct expenses for:
- Raw materials and supplies (cultivators)
- Indirect product costs for cultivators (machine maintenance, quality control, inspections, supervisory wages)
If you’re just a cannabis retailer, then you’re limited to costs for products and acquiring merchandise. This includes transport expenses for wholesale marijuana and electric bills for inventory-only areas.
2. Setting Up a Non-Cannabis Entity
In a nutshell, if you have a company building where the product never enters, then it’s not subject to 280e. For example, a property management company.
In this case, the cannabis business is trying to properly allocate a portion of its rent or management fee to the cost of goods sold. The management company receives this income and can write off applicable expenses that are otherwise nondeductible under 280e.
Now, it’s worth noting that some try to abuse this tactic. If you wrongfully try to claim this on your taxes and fail an audit, you’ll be penalized. So be sure any non-cannabis entity you claim exists and is trying to earn money (vs. sitting there to be used to launder tax deductions).
3. Setting Up a Cannabis IP Entity
Your cannabis business is part physical and part intellectual. If you’re building a brand, then you’ll have assets like logos, trademarks, images, recipes, trade secrets, and formulas.
These are all considered intellectual property (IP).
The good news is you can separate this as its own entity (i.e., a marketing arm of your business). This way, your cannabis business can pay royalties to your IP entity, which will count as COGS (AKA a deduction).
4. Deduct Real Estate Depreciation & Utility Expenses
Let’s say your cannabis business is owned separately and receives rent from your cannabis sales (like in the example above). Both can be owned by a single person or two separate people.
As long as no cannabis is trafficked through it, you are clear of 280e pitfalls.
With that said, there’s another way you can reduce your tax burden — by deducting depreciation for things like walls, shelving, cabinets, floors, lights, etc.). And you can also deduct the expenses for electricity.
Reduce Your Taxes with the Help of a Cannabis Accountant
It’s critical to understand that tax laws and codes are complex. If you make mistakes with your deductions, then you could end up owing more than you should.
By teaming up with an accountant specializing in the cannabis industry, then you’ll have an advisor who can help ensure this doesn’t happen.
Ready to learn how you can reduce your taxes for next year? Then get in touch with us today!