Follow this checklist to gather everything you need to fill out your cannabis tax return.
- You will need your tax returns for prior two years, plus copies of your sales, excise, and local tax returns.
- Make sure you have your income statements ready as well as your P&L and balance sheets.
- Watch out for expenses that can’t be deducted under the 280E regulation.
Speak to one of our experts for help filing your cannabis taxes.
Despite the government shutdown, tax season has officially begun. Income tax-filing season will open January 27, 2020. You have until the deadline of July 15, 2020 to submit your business tax return (unless you qualify for an extension).
Given that 2019 was the second year for California’s legal cannabis market, it’s important to get your taxes done early and correctly.
Remember, states and Federal tax authorities are most concerned about collecting the right amount of tax revenue and a few mistakes on your tax returns could cost you additional penalties and fines. There is sure to be a lot of scrutiny on operators from both state regulators and the IRS who will be looking for reasons to penalize those who are not compliant.
If last year’s case of Harborside vs. the IRS is any indication, the tax authorities are showing no mercy in prosecuting negligent or noncompliant cannabis operators.
Here’s a general list of some information you should have at hand that you will share with your CPA so that they can accurately fill out your tax return.
Miscellaneous Documents & Information
- Tax returns for prior 2 years
- Copies of sales, excise, and local tax returns
- Cash handling log
- Articles of Incorporation
- IRS issued Employee ID Number (EIN)
- Sellers Permit Number
- Monthly banks statements (if applicable)
- Balance Sheet
- Profit and Loss Statement (P&L)
- List of owners/business partners and their ownership percentages
- Social Security Numbers of each partner
- Building information include lease and tenant improvement receipts
- List of new assets purchased + receipts
- Quickbooks and POS login information
- Gross receipts
- Returns and allowances
- Business checking/savings account interest (1099-INT or statement)
- Other income
Cost of Goods Sold
- Review this blog post to see what you can take under COGS deductions. The 280e regulation prevents cannabis operators from taking many of the typical deductions.
- Bank charges & finance fees
- Commissions / fees
- Contract labor: Forms 1099-MISC and 1096
- Computer & internet expenses
- Health insurance: including premiums paid to cover the sole-proprietor and family and premiums paid on behalf of partners and S corporation shareholders
- Interest expense: including mortgage interest on building owned by business or business loan interest
- Meals & Entertainment
- Office supplies: Pens, paper, staples and other consumables
- Mortgage interest or rent paid
- Homeowner’s or renters insurance
- Rent expense: office space rent, business use vehicle lease expense, or other equipment lease
- Repairs / maintenance
- Taxes / licenses
- Transportation and travel expenses
- Wages paid to employees: Form W-2 and W-3
- Federal and state payroll returns (Form 940, Form 941, etc.)
- Employee benefit expenses
- Other business related expenses
Please note that many of the expenses listed above may not be deducted because of tax code 280E. Its important to speak with a CPA who is well-versed in cannabis regulations to ensure you’re doing everything possible to reduce your tax burden.
Though cannabis is technically still a Schedule I controlled substance, cannabis operators are still responsible for filing a tax return with the IRS.
The type of return you file will depend on your business entity – the way you’re structured. For example, a corporation would file a Form 100, California Corporation Franchise Tax or Income Tax Return. Here are some other common business structures:
- Sole proprietors and single-member LLCs: Report business income and expenses on Schedule C attached to their Form 1040 Individual Income Tax Return
- Partnership or multi-member LLC: Report business income and expenses on Form 1065
- S corporations: report business activity on Form 1120-S
For a full list of possible forms you may need to send to the IRS, click this link.
The main difference in filing your taxes as a cannabis operator (versus a regular small business) will be in the deductions, credits and records you’ll be asked to submit at the time of your filling. Remember, the 280E dictates what you can and can’t take as a deduction. We suggest working with a CPA firm that has cannabis industry experience to make sure you’re completing the right forms and taking the proper deductions.
State taxes vary, of course, depending on where you are. To find the cannabis tax rates in your state, check this helpful guide.
City & Local Taxes
Cities and counties may impose additional taxes to produce revenue for their community, and fluctuating tax rates depend on where your cannabis company operates and is located. To find your local tax regulations, contact your municipality.