Cannabis Industry Compliance and Regulation

Our premier CPA firm provides expertise in a wide range of areas within the cannabis industry. We can help you make sure your cannabis business is following regulation and is compliant throughout the business.

Tax Compliance

We’ve worked with more than 400 individuals and cannabis ventures to help save nearly $1.5 million on their taxes. Cannabis companies across the states are regularly hit with audit requests as they struggle to untangle complex tax codes. We can help save you time and money by:

  • Allocating your business’s non-deductible 280-E expenses in a compliant-driven manner;
  • Structuring your company to mitigate and minimize the negative impact of 280-E;
  • Ensuring that all local, state and federal income taxes are being completed on-time and in compliance with state and federal regulations;
  • Reducing the potential outcome of an IRS tax audit;
  • Providing feedback on record-keeping and financial documentation processes.

Available Deductions

Your deductions available may depend on the type of Cannabis business you have:

Navigating the waters of tax deductions can be a cumbersome and complicated process. However, GreenGrowth CPAs is here to simplify and make sense of those overwhelming tax codes. Let’s discuss the deductions available and how we can help you maximize them.

The Internal Revenue Code (“IRC”) tax code has specific provisions regarding which businesses are permitted to take cost of goods sold (COGS) deductions. You should claim every deduction your business is allowed. For cannabis-production businesses, there are significantly more opportunities to claim items as COGS, which may include:

  • Production-related wages
  • Rents
  • Repair may be considered as COGS upon the sale of the inventory for accrual-basis taxpayers and immediately for cash-basis taxpayers that are cannabis-production businesses
  • Marketing and general business expenses remain nondeductible

Indirect production costs that may be considered as COGS include (but are not limited to):

  • Repair expenses
  • Maintenance
  • Utilities
  • Rent
  • Indirect labor and production supervisory wages
  • Indirect materials and supplies
  • Costs of quality control/inspection

These deductions are only permitted if they are necessary in the growth of cannabis. The IRS has also permitted producers to claim some additional COGS deductions, as long as financial statements are in accordance with Generally Accepted Accounting Principles (GAAP).

But how do you know which of your expenses fall into which category? How can you be sure they are deductible? This is where GreenGrowth CPA can help. Tax preparation, tax codes and deductions are our bread and butter (and something we genuinely enjoy).

Download our easy-to-use Cultivation Tax Template.

Cannabis businesses don’t have the luxury of deducting the same business expenses non-cannabis businesses do.  Since the industry is still under scrutiny from the federal government, we must be careful that the items we are deducting are truly deductible under IRS guidelines.

Cannabis distributors, retailers, and delivery services may be able to claim deductions for:

  • Transportation
  • Utilities for designated inventory areas
  • The wholesale purchase price of cannabis for resale

These items are considered COGS (cost of goods sold) and are one of the key factors to reducing your taxable income.

The Internal Revenue Code (“IRC”), has very specific provisions about which cost of goods sold (COGS) deductions and expenses may be included.  Because of the importance in making sure the items you deduct are indeed deductible, GreenGrowth CPAs will work with you to ensure every item deducted is warranted and within IRS guidelines.

Another potential tax-deductible service is the business of caregiving.  If a dispensary sells marijuana and is in the separate business of care-giving, the care-giving expenses are deductible.

Each state has different laws surrounding caregiving services and how much is tax deductible. For example, in a 2007 case, Caregiving Californians Helping to Alleviate Med. Problems, Inc. v. C.I.R., 128 T.C. 173, the Tax Court determined that CHAMP could take business deductions for the patient care portions of the non-profit’s medical marijuana dispensary operations.

The tax court agreed that CHAMP was actually two separate businesses. The ruling found that the CHAMP’s primary business was actually caregiving services, which would permit the deduction of business expenses.

As a result, it is a good idea to add additional services onto your cannabis business so that you can take advantage of as many of these COGS deductions as possible.

This is just one example, but each state has various laws around how to deduct caregiving expenses. GreenGrowth CPAs specializes in maximizing the allowed deduction for caregiving services. We would love to talk more about how we can maximize your refund.

Have questions?

We’re here to help. We have a proven track record of saving our clients substantial amounts of money by helping them to navigate all of the tax deductions that apply to their specific circumstances. We’ll make it our mission to help you save as much money as possible by applying this same methodology to your business.

Lowering your chance of an IRS audit

One of GreenGrowth CPAs’ core competencies is audit and assurance services. We will review, compile, and assess your information so you are prepared if an IRS audit were to happen.

IRS audits are an uncomfortable and long process. Although they are not completely preventable, here are a few things you should know about them:

  • If your business earns more than $200,000, you have a higher likelihood of being audited
  • Be aware of Form 8300. This is used to report cash transactions of $10,000 or more
  • Underreporting your income is one of the top IRS red flags
  • Maintain careful records and copies, should the IRS wish to examine your cost of goods sold (COGS) more closely. This includes all filed tax forms and receipts as a part of your COGS deductions
  • File on time
  • Comply with state and local laws. Disclose all activities from your business to your lawyer and CPA.

280-E Mitigation

280E is a revenue code that disallows businesses that are related to “the trafficking of Schedule I or II substances” to deduct ordinary business expenses aside from the Cost of Goods Sold (COGS). This still applies to CBD related products and services. The only case where businesses might be able to claim deductions is if they can prove that the CBD came from an industrial hemp source that is legal per state law.

Rules Regarding CBD Businesses ​

We get many questions about CBD. It’s imperative that you are aware of individual rules regarding the ingredients in your substances.

Cannabidiol (CBD) is one of more than 400 substances that is found in marijuana and it is not psychoactive. This means it does not cause changes in brain function. Many states have already passed laws that have permitted the use of CBD extract (typically in oil form) often with traces of tetrahydrocannabinol (THC), for the treatment of epileptic seizures in children. CBD has only been legalized in the United States since 2014, only when it is sourced from the hemp plant and not the cannabis plant.

GreenGrowth CPAs can provide clarification around your state law as it relates to 280E, CBD and other investment questions. Ask us how we can help.

GreenGrowth CPAs can provide clarification around your state law as it relates to 280E, CBD and other investment questions. Ask us how we can help.