Tax Tips For Cannabis Businesses
- Laws Vary By State
- Taxes Vary By Business
- Deductions Are Not Allowed
- Cash Is Required
- A Tax Accountant Can Be Helpful
The cannabis business has been booming for the last several years and with it comes strict cannabis tax laws. Since the plant is still illegal federally, tax laws are very complex as each state has their own procedure. It can also be quite costly since each operation, from growing to selling, has a specific tax. Here are several important factors to know before venturing into the cannabis business.
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1. Laws Vary By State
Cannabis tax laws are regulated by the state. There are a total of 9 states with legal recreational weed and 29 allowing medicinal distribution. Almost every state has a sales tax for each transaction. States like Alaska have no state sales tax, so the growers are charged per ounce and the price will be higher for the customer to cover the difference. States like Colorado impose a sales tax license for both medical and retail sales. Other taxes could include a local sales tax, a state sales tax, and a state marijuana sales tax.
2. Taxes Vary By Business
Depending on their role in cannabis production, a business could be paying several types of taxes. Recreational and medicinal marijuana shops will be taxed separately and, in some states, medical cannabis may be tax exempt for CBD (low THC cannabis) products. Dispensaries must pay an excise tax, which includes the transfer of marijuana from the growing facility to the store. The cultivator may be charged a tax if their product is used for retail purposes. The end product such as hemp, flower, or plants may also influence the taxed amount.
3. Deductions Are Not Allowed
Most businesses write off their expenses like travel, utilities, and supplies. However, according to Smallbusiness.findlaw.com, the 1982 federal law imposed by the IRS prohibits businesses involved in drug trafficking and sales from claiming deductions, which includes legit cannabis operations. This makes the production and sales costs of marijuana high. Ironically, cannabis enterprises still need to report income taxes to the IRS.
4. Cash Is Required
To make matters even more difficult, many banks and credit card companies do not offer their services to pot businesses. Cash must be used for the retail and operational costs. Keeping a cash paper trail for tax purposes can be tricky, so excellent record keeping is essential. This also puts a strain on tax evasion monitoring by the IRS. The need to stop money laundering and false profit claims has created a huge problem for the cannabis industry and the IRS as taxes must also be paid in cash.
5. A Tax Accountant Can Be Helpful
Given the complexity of pot tax laws, varying from state to state and from business to business, hiring a private tax accountant is not a bad idea. There has been a rise of accountants who specialize in marijuana business consultation. They can assist with the filing of state and federal income tax returns, ensure compliance with the federal 280E law disallowing business expense deductions, and search for ways to save money through sales adjustments and tax credits.
A venture into the cannabis business can be a wealthy endeavor as the demand is high. Challenging cannabis tax laws can inhibit profit, so it is best to be aware of them before starting a company.
