19 Dec 3 Tips for Cultivators to Reduce Tax Burdens
Cannabis companies can’t claim deductions on their year-end tax forms. In 1992, Congress enacted section 280E of the Internal Revenue Code which states that deductions and credits are not allowed for any expenses paid during the tax year for business activities that involve the sale of controlled substances, which includes cannabis.
Cannabis is categorized as a Schedule I substance, and until the federal government removes cannabis from this list, cultivators will need to find other ways to reduce their taxes. But with advance planning, along with the understanding of some codes, cultivators can take proactive steps to reduce their taxes, and a good place to start is with 280E.
1. Be Truthful
Cultivators should track all inventory and be mindful of potential penalties. If 20% or more of your income is not reported, you will receive a substantial underpayment penalty. Substantial. It is absolutely imperative that you report all your income correctly.
2. Keep a good accounting system.
When Congress passed Section 280E, it feared possible constitutional challenges to the law. To prevent such challenges, it added an exclusion that allowed a deduction for the cost of goods sold – even where the goods are illegal under federal law. “Costs of goods sold” is essentially inventory costs, including the cost of the product, the cost to ship it in and any directly related expenses.
280E has less of an impact on growers than it does on retailers. The vast majority of your expenditures incurred that go into that product are direct expenses, and they go right into the cost of goods sold, which are allowable deductions under 280E. Compare that to a retailer, who the vast majority of their expenditures are selling expenses, and selling expenses are not qualified to go into cost of goods sold.
3. Understand how 280E impacts your business.
The 280E federal rules are pretty clear, but many states that have legalized cannabis have a different system with regard to tax deductions. For example, some states will allow you to deduct your full business expenses. This is a huge benefit to cannabis businesses, but one that can be a bit complicated.
It’s important to know your state tax rules and their particular deduction rules, but don’t rule out getting some federal deductions. Meticulous accounting can separate cannabis activities from unrestricted activities so that the taxpayer can claim some federal deductions.
Taxes are often an afterthought when you are trying to build your cannabis business. But taxes can really help small businesses to get off the ground and more established business to expand and thrive. To optimize your tax deductions, you really need help and advice from a qualified attorney or accountant.
Good luck on your budding business!