If you are a cannabis business, you have most likely heard of the tax law called IRC 280E. This law originated in the 1980’s at the height of the war on drugs. According to this law businesses that deal with schedule 1 or 2 drugs cannot claim the same deductions as conventional businesses. At the federal level marijuana is still a schedule 1 drug. Therefore, unfortunately this heavily affects cannabis businesses at tax time.
Here at Calypso Financial it is our business to know the ins and outs of the cannabis tax industry. We put together some important tips on how to stay on top of your tax bill.
Did you know there are three options when setting
up your corporate structure? They are a C-corporation, an S-corporation, or an LLC. The C-corporation is generally the structure that lawyers suggest for cannabis businesses because it is a tax paying entity.
You probably know the earlier you file your return the faster you receive your refund. The next important tax advice we would like to give you is, file your taxes early. The IRS is scheduled to begin accepting e-filed returns on February 12, 2021.
Preparing your taxes early will give you time to arrange your payment in the case you owe money to the IRS. This extra time is extremely helpful to taxpayers who wish to find out exactly how much they will owe.
Now let’s talk about payroll taxes. Every business that has employees is subject to payroll taxes. They are required to hold out those taxes for the employees. Cannabis businesses however must be especially careful when deducting payroll taxes. There are some jobs that are tax deductible and others that are not.
For instance, you may have a cultivator work as a part time budtender. Since cultivation is related to the growing and processing of cannabis those wages are tax deductible. Yet According to IRC 280E cannabis businesses cannot claim budtenders salaries. Therefore, you must keep immaculate records of your employee’s tasks to be sure you are paying to correct amount of payroll taxes.
Another important thing to remember as a cannabis business is to be audit ready at all times. Cannabis related businesses are much more likely to be audited than conventional businesses. To ensure you are audit ready, you must document all your expenses and revenue. This means from seeding and cultivation to marketing and sales, each item must be in a detailed document. The IRS will ask for this information. They will also want to see a complete list of your cost of goods sold. You face a fine if you fail to show exactly what each deduction and credit is for.
We understand that IRC 280E can be difficult to navigate. The best advice we can give you is this. Seek out an expert in the field. You have a lot to juggle already if you are a business owner in the cannabis industry. We would love to take the worries off your plate. Call today for a free consultation!