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State/Local Cannabis Tax Information

C 940/941, 8300 forms, Statement of Information, Form 5472, and Form 8962. Cannabis companies across the country are regularly hit with audit requests as they struggle to untangle complex tax codes. Our team of state and local cannabis tax advisors ensures that all local and state income taxes are being completed on-time and in compliance with state and federal regulations. We prepare businesses’ annual and quarterly taxes by conducting internal audits to help clients with tax preparation for the upcoming tax season. It is very important to start preparing for March 15th and April 15th NOW. Do not hold out for governmental changes, like the possibility of the MORES Act passing. Even if the MORES ACT passes, cannabis operators will still be required to file taxes in 2021 just like any other year. We prepare taxes for:

  • Individual 1040 // Includes 1 Single Member LLC (prepped on a Schedule C),
  • C-Corporate Return – 1120,
  • S-Corp 1120S,
  • Partnership 1065- Multi Member LLC,
  • Schedule C ONLY (this means that we are NOT prepping their 1040),
  • $0 File Return,
  • 1099’s and W-2s,
  • Sales Tax Filings (includes use taxes and muni/county local taxes),
  • Quarterly Payroll Taxes,
  • Form C 940/941, 8300 forms, Statement of Information, Form 5472, and Form 8962. 
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Tax Opportunities

Here are some opportunities we will explore for your cannabis business:

  • Use current losses for quick refunds The CARES Act resurrected a provision allowing businesses to use current losses against past income for immediate refunds. Net operating losses (NOLs) arising in tax years beginning in 2018, 2019 and 2020 can be carried back five years for refunds against prior taxes.
  • Consider the timing of payroll tax deduction The CARES Act allows employers to defer paying their 6.2% share of Social Security taxes for the rest of 2020.
  • Take advantage of the business expensing election (Section 179 election) for fixed assets placed in service during the year 2020 For qualified property placed in service in tax years beginning in 2020, an immediate expense deduction can be taken. There is a maximum amount that may be expensed under the Code Sec.179 dollar limitation and it is $1,040,000.
  • Accelerate and pay 2020 employee bonuses Generally, accrual basis employers want to incur the liability for bonuses and have it deductible for the current year and then pay the bonuses to employees the following year, so that employees report the income the following year if they are cash method taxpayers.
  • Income and Expense Timing Businesses that haven’t expected to be in a higher tax bracket the following tax year have long deferred income and accelerated expenses to minimize taxable income. Since the Democrats won the White House and the Senate, and retain the House of Representatives, tax rates could increase in 2021. In that case, it could be advantageous to accelerate income into 2020, when it would be taxed at the lower current rates.

How do state laws relate to 280E?

The STATES act simultaneously brings together federal law with state cannabis laws and addresses the cannabis industry’s banking and tax issues. The Internal Revenue Code (“IRC”) tax code has certain parts regarding which businesses are permitted to take the cost of goods sold (COGS) deductions. You should be able to claim every single deduction that your cannabis business is allowed to.

For cannabis-manufacturing businesses, there are many more opportunities to claim certain items as COGS, which may include: production-related wages, rents, repairs (these items may be considered as COGS upon the sale of the inventory for accrual-basis taxpayers and instantly for cash-basis taxpayers that are cannabis-production businesses), marketing, and general business expenses remain nondeductible.

One interesting question we’ve had was around IRC 280E and deductions for cannabis businesses. “Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income. The Internal Revenue Service takes the position that section 280E-affected taxpayers must calculate their cost of goods sold pursuant to Internal Revenue Code section 471 and the associated Treasury Regulations.”

This is reassuring news and clarifies many remaining questions about section 471. Now make sure to understand that it will depend on the cannabis vertical you operate in to determine which indirect costs can be backed into the cost of goods sold. Do you need state and local cannabis tax help? Reach out to us today!

IRC 280E Case Study on Licensed Cannabis Business Taxes

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