Americans are gearing up for Tax Day, a day that always seems to come too soon. This time of year is a stressful season for most business owners, but for cannabis businesses, taxes are even more migraine-inducing. The federally illegal industry still attracts a keen eye from the IRS, especially since the all-cash basis of the cannabis industry makes it particularly fertile for fraud. Cannabis business owner must be vigilant all year long to avoid tax issues that could literally cost their business millions.
Cannabis Retail Tax Tips
1. Be aware of 280E and cannabis retail rules.
The IRS doesn’t shy from bringing legal cases against cannabis dispensaries they deem are acting outside of the tax law. If you’ve paid attention to legal cannabis news in the United States, odds are you’ve heard of the landmark case that the IRS mounted against Harborside, a long-running medical cannabis dispensary in California.
The subject of this case is IRS Code 280E. This legal inclusion states that a business trafficking in a controlled substance cannot deduct the cost of goods to run that illegal business on their taxes. In theory, this law makes sense. According to the IRS, and the U.S. tax court, cannabis is still a federally illegal drug. So even a state-legal operation is unable to write off their business expenses like any other legal business can. Harborside was required to pay back taxes for the cost of goods (COGS), also known as business expenses, that Harborside had deducted from their taxes.
It’s important to talk with an expert tax professional who can perform a 280E analysis for your cannabis company. They can help determine what is and is not allowed and how to structure your business entities for tax efficiency.
2. Start early and utilize technology.
For a cannabis business, tax season should never really end. Each quarter, you need to make estimated tax payments and the only way you’ll be able to do that with any accuracy is if your bookkeeping is up to par all year long. Your record keeping process must be pristine to avoid tax issues or major accounting errors. But just because you likely operate an all-cash business doesn’t mean the rest of your business has to operate in the dark ages. Rely on technology to help with record keeping!
A good retail cannabis point of sale system will record the required taxes collected at each purchase, incorporating tax accounting into your employee’s normal workflow. Scan every receipt, invoice, and expense as you operate throughout the year, so you don’t have a tax nightmare come the spring.
3. If you are paying taxes in cash, arrange safe transit ahead of time.
As ridiculous as it sounds, the lack of access to banking for cannabis businesses means that state tax offices and the IRS receive billions of dollars in cash for tax payments each year. In 2017, it was estimated that the U.S. government collected $4.7 billion in tax revenue from legal cannabis, the vast majority of which was paid in cash.
If you operate a cash-only cannabis dispensary, be cautious about cash transportation. Traveling with that amount of money, no matter how short the distance, is a risk. While most armored car companies refuse to serve the cannabis industry, there are reliable, bonded, and secured cash transportation services that you can utilize.
4. Hire a trusted CPA with cannabis experience.
Every cannabis business owner should hire an expert to handle their taxes. The risk of audit, serious fines, asset forfeiture, and more should be enough motivation to find a seasoned CPA professional with cannabis experience. How do you find one? Rely on your industry friends for recommendations! Be proactive about finding the right CPA; don’t wait until there are problems.
Navigating the cannabis industry can be stressful as a retail owner. We can help. For more cannabis industry news, best practices, and trends subscribe to our blog.