It’s that time of the year again, tax time! And if you still haven’t filed your tax return or are finishing up the details here are three last minute tips every cannabis operator should know.
The tax deadline is Monday, April 18th this year. For most business operators and CPA firms alike, this time of year can be very stressful and busy as organizations gear up for the big day, tax day! Check out these last minute tips to get you squared away with tax season.
- Tip #1 Be sure you have a clear-cut understanding of your local and state tax implications in your jurisdiction.
- Tip #2 280E is one of the biggest obstacles operators face in the cannabis industry. Be sure you fully understand the 280E requirements for your vertical.
- Tip #3 If you’re still not ready for the tax deadline, then file for an extension. Keep in mind that an extension is an extension to file, but not an extension to pay. Therefore, you can still accrue interest from the original deadline.
Tip #1 Understand Local and State Tax Implications in Your Jurisdiction
Be sure you’re not overlooking any state or local taxes in your area. This could range from sales tax to franchise taxes and business licenses. These types of oversights and errors could lead to problems down the road. And certain taxes, such as sales tax, are actually considered your fiduciary responsibility. That means you are responsible for collecting those taxes on behalf of the state.
Once you get behind, it’s almost impossible to catch up. Moreover, this can lead to fines, penalties, and even business closure. Keep in mind that even if you are structured as an LLC or corporation, you can still be held liable for collecting those taxes. And depending on your role in the business, you can be criminally liable for unpaid taxes. That includes excise taxes, payroll taxes, sales taxes, and income taxes.
Cannabis businesses can be affected differently depending on which state they are organized. Therefore, it’s essential to obtain the advice of licensed professionals if you operate out of multiple states or are unsure about the 280E tax law for your area.
Tip #2 Know Your 280E Requirements
Internal Revenue Code (IRC) 280E is one of the biggest obstacles plant-touching cannabis operators must overcome. A mismanaged 280E approach can raise your tax exposure 50-80% and put you at serious risk of an IRS audit. An educated approach to allocating Cost of Goods Sold (CoGS) and entity structure can save you money, reduce tax complications, and protect you in the event of an IRS or state/local audit.
The key to navigating 280E is understanding Cost of Goods Sold (CoGS). Costs are deductible if a cannabis operator can prove that a business expense is necessary to the production of goods. The goal is to allocate as many indirect costs as direct costs included in CoGS. Thereby minimizing tax exposure for our cannabis clients.
The biggest challenge with 280E tax law is understanding how to maximize deductions allowed for each vertical and within their operations while minimizing their tax burden. The company either pays the taxes itself or passes through to the shareholders or members of the business. Then operators report and pay tax on their personal income tax returns depending on the entity structure.
As cannabis accountants, we can help operators reduce the adverse taxation of Section 280E; by analyzing cash flow, properly planning, and documenting intentions. Calculating your own business and personal tax returns can be very complex. Rapidly changing legislation and tax law require well-trained accountants specializing in the cannabis space.
If a cannabis company is solely in the business of growing and selling cannabis, most of its expenses can be deductible. Out of the four main cannabis verticals, cultivators have the most opportunity to minimize their tax payment compared to the other three. Because most costs are directly relatable to the end product and are easier to prove. It becomes more cumbersome when the operation expands into other verticals or does not grow the product itself.
Dispensary operators are the most limited vertical for allocating expenses under Cost of Goods Sold (CoGS). Therefore, operators must keep accurate records to track and code direct and indirect costs properly. Retailers who work within other verticals in the industry must remember to correctly document expenditures associated with operations of each vertical separately.
Tip #3 Filing for an Extension
Okay so taxes are due, and you’re still not ready. What to do? Reach out to your trusted cannabis accounting firm or directly to the IRS to file an extension. It’s much better to file for an extension than to be late or not file your taxes at all this year.
And even if your business didn’t perform well, you still need to file. We are actively helping cannabis operators file their extensions. If you need help filing an extension, reach out to us today!
It’s also important to note that while you may file an extension, to extend your tax deadline, you’ll still accrue interest from your original due date. An extension is an extension to file, but not an extension to pay! You won’t get a penalty for filing late, but you may be racking up interest and other potential penalties throughout the entire extension time.
To learn more about managing your tax strategy, reach out to our team of tax experts at GreenGrowth CPAs. We are here to help your cannabis venture through any level of the accounting, tax filing, or business cycle.
We employ several financial programs to assist the company with its fiscal responsibilities, including tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.
For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.