Top Five Questions from Cannabis Business Owners
Throughout the year, we often get questions from people who are either opening a Cannabis business or have opened one and still have some questions and concerns about what they have going on. Here are our answers to each of those pressing questions that we constantly get!
1. What is 280E? Why should I care about it?
280E is the section of the Internal Revenue Code which states that, essentially, among other things, businesses that traffic in Schedule I Controlled Substances are not allowed to deduct regular business expenses from their business income. Your only true “deduction” as a result is the cost of the actual product you sell (aka, Cost of Goods Sold.) (Fun fact: all revenue, whether legally or illegally derived, is required to be reported on tax returns.)
As a cannabis business owner, you should care because
- a) there are steep financial penalties for attempting to avoid paying tax,
- b) keeping track of your 280E expenses requires you to be on top of your administrative and record-keeping game, and
- c) there are ways to minimize the tax you pay, depending on how you operate your business.
2. What can I do to avoid paying extra taxes with 280E? Can I structure multiple entities in a way to help me avoid paying taxes?
The short answer is there is no good way to structure your business from a legal perspective to help you pay less in tax. Unfortunately, the US Tax Court has almost unanimously determined that any cannabis business with multiple legal entities is still one “trade or business” and hence 280E applies to all. (One caveat: the sale of non-“plant touching” products can likely include deductible expenses, assuming that the non-“plant touching” revenue is fairly substantial. Another way to say it: you can’t sell a few t-shirts and apply all your non-deductible expenses to that revenue.)
The best way to pay less tax is ultimately to structure your business in a way that avoids spending excess cash on those non-deductible expenses. Keep your overall wages low by having less storefront (and pay your employees well so they stick around and you build goodwill.) If you’re a manufacturer or a cultivator, you have more expenses available to deduct because more of your expense is Cost of Goods Sold.
3. Do I really need to keep all of these receipts?
Yes, you do. Please do. The IRS wants you to keep them. Fortunately, there are many easy to use tools, apps, etc., that make this once arduous process a breeze. (Fun fact: my first accounting firm job in 2004 when I was in college, the partner on the job handed me a box full of invoices, many of them scribbled, and asked me to code them into Quickbooks. Tools like the ones we have available now would have made that job a lot easier.)
4. When should I start my accounting?
Contrary to popular belief, you do need to begin accounting the moment you begin your business. Remember that EIN letter you got when you started your business and it told you your first due date of your first tax return? The IRS is expecting a return by that date. So start your accounting the day you open your business!
5. Can I do my own accounting?
You might be able to get away with this type of arrangement with a cash business, but it won’t work for cannabis. The IRS released a great educational resource where they state, clearly, that keeping good records is vital for cannabis businesses. That means tracking every invoice, reconciling every bank statement, understanding how and why every number is what it is on your profit & loss and balance sheet returns. It is important to have these in place because if your return is selected for audit, you will want a trusted advisor in your corner to get you through that audit. It’s vitally important to have a trusted cannabis-educated accountant to help manage your business.
Don’t take risks with your financials – invest in the security and peace of mind that comes with a dedicated cannabis-educated accountant. Morem & Waller CPAs is here to be that trusted partner for your cannabis business, providing expertise and guidance every step of the way. Contact us today to ensure your business’s financial health and compliance.