Cannabis Knowledge & Insights

Trump Taxes: Lessons to Reduce Cannabis Business Taxes

Seeing some discussion about Trump Taxes, it brings up the thought about cannabis business taxes, proper cannabis accounting, and how to reduce cannabis business taxes.

In this video, Natalie & Jim discuss findings in the Trump tax article and give some thoughts on how you can plan for your taxes.

If you need help with your cannabis business taxes, then please reach out to us at https://greengrowthcpas.com/get-started/ or call 800-674-9050.

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Video Transcript

All right. So you may have seen Trump’s tax returns have been unearthed from somewhere somehow, and there’s a lot of news stories about this. So we’re going to unpack what’s going on with this. This is not a political conversation. This is just more around the tax portion of it, the factual nature of it, or what we believe to be the facts of this and kind of how would this impact other business owners and things of that nature? So what I have with me now is Natalie Rasmussen from our team at GreenGrowth CPAs, anything we talk about is not guidance or advice, tax advice, legal advice, business advice in any manner whatsoever. This is just a discussion about some of the facts and thoughts around what has happened over the past 48 hours. And if you see this many, many other days later, so let’s just go ahead and hop into what we’re talking about here, Natalie.

Sure. So as we’ve all pretty much seen right now, …, you know, that president Trump has only paid about $750 in personal income taxes. Now, his camp is saying, well, that’s not true. He has paid millions and other taxes, but what we’re talking about is when we file our individual income taxes, that number does not include, say you’re a business owner and it doesn’t include the taxes that you pay for your payroll taxes. It doesn’t include any maybe sort of excise taxes that you pay, everything that sort of flows through to you or that you pay personally, or that you report personally on your income tax return. For any given year, you come up with a number, you know, your income, you have your income, and then you have your deductions. Then you come up with this taxable income number and that’s what you pay tax on.

And president Trump has been able to use current tax law, legal tax law, to sidestep a lot of tax liability and pay a small amount of tax. And a lot of people don’t understand it. They may have heard, …, you know, William buffet has very famously said, you know, my secretary pays more in tax than I do. And people don’t understand that concept. And what he basically means is that when you are a higher level income person, maybe a lot of your income or most of your income is not wages. It may be investment income. And the current tax structure as it’s set up is that if you have investment income, depending on what type of investment income that is, …, it’s taxed at a much lower tax rate than say what your marginal tax rate could be. So you may be a millionaire and you’re in the top tax rate, maybe say on wages, but you have a lot of investment income and maybe that’s only being taxed at 20%. And that’s what he needs is that his secretary who probably only has wages maybe only has some self employment income or something like that is taxed at a much higher rate, you know, per you know, whatever her her tax bracket is. Does that make sense?

Yeah, it makes sense. The type of income is very, very important in determining at which rate it’s taxed as, as it’s not just the gross amount of income, there’s going to be an adjustments throughout with deductions to get you to an adjusted gross income, which is then tax.

Correct. So, so, and, and in reading the New York times article, I not going to go point by point, and if you certainly have any questions, please ask, but what looks, what it looks like he was able to use. Like I said, very legal tax, …, strategies to offset any tax liability. He has paid tax in prior years, but there’s something called what’s a net operating loss. And so if you have businesses, you have maybe a business that’s making money and you have another business that’s losing money. Essentially. It kind of goes to the same place and it, and it offsets. And so you can take this income and with this loss and just sort of wipe everything out and up until the ironically enough, 2018 trap Trump tax plan, if you and this came into play, let’s say in 2008 during the great recession, you know, when, when real estate was going under, everybody was, it was horrible.

You had a company, let’s say you have a construction company and you have been paying taxes and making a lot of money and paying a lot of taxes all the way through and construction. And I live in Las Vegas and construction was one of those industries that was tremendously hit hard, all of a sudden construction dries up, right? So you had that, you paid, like, let’s say a million dollars in tax here, a million dollars in tax and million dollars in tax. And all of a sudden you have a $300,000 loss. Let’s just say on your business, you could take that loss and you, you could make a choice. You could say, okay, I think I’m going to make money in future here. So I’m going to take that loss and offset income, future income. Or you could take that loss and go back and get back some of that tax that you’ve already paid.

So what he was doing is that he had this, these giant losses and he was able to take it back, you know, and offset income that he had paid. And I think, and please forgive me if I don’t have the facts. Right. But one of his businesses had like a billion dollar loss and he was able to take that loss and take it forward and it offset future income for, and you’re allowed to take that loss until it’s used up for 20 years. So he took that billion dollar loss, how he got to that loss is another story when he took that billion dollar loss and offset income for 18 years forward.

Gotcha. Okay. That makes sense. That makes sense. And so this was something, as you said, I think you’ve kind of danced around us a little bit when the housing market crash and like the great recession happened, there was a second incentive plan or some kind of stimulus plan or changes to the tax. All that made this a Carry backwards type of thing possible. Right. Is that what we talked about in our team meeting this morning, essentially that, you know, he was able to build up so much losses in one year that was specific for that tax, that it, …, he was able to take it back and then create kind of a surplus in his taxable income or sorry, ms. Tax payments, and then got a refund from that. That’s like the 73.

Correct. So, you know, and there’s, there’s always mechanisms that you can do. You can push income into a year. You can push expenses into another year. So, you know, you’re, you’re always working to see what, what do you want your year to look like? You know, do you, do you want it to be a high income year, a low income year? And there’s always some things that you can do to sort of push, you know, not accepting come until the next year, whatever. But, so there was such a large loss that he was able to, didn’t go back three years, get back all of that income tax that you had paid in. And if there’s still any leftover that was ever left over, can still go forward.

Got you, got you. So it sounds like tax planning aside from just doing your taxes and filing your taxes, planning how you want your year to shake out, especially when there’s a little bit of predictability in your income, whether that’s wages, investment, income, rental income, potentially a business that’s, maybe you’re an LLC member and you’re going to be, you know, 50% of the profits going to flow over to you. Planning seems just as important as filing. Can you help me understand a few aspects of planning for cannabis businesses that they should think about that maybe they could apply when they look at their full year? And totality is like, all right, will you say for old school, for an example of a business has been around for three years and it has a consistent growth rate. It’s nothing parabolic, but there’s a consistent maybe 20 or 30% growth every year. What are some planning tips or things that these business owners should think about?

Well, you know, and you’re, you’re never going to know what the tax rate is going to be from year to year, we have an idea, but there could be a giant shakeup in Congress this year. So we don’t know if tax rates are going to change dramatically, if they’re going to go down or if they’re going to go up. So we always sort of know that at least for the next couple of years, we kind of know what that tax rate is going to be. We know that, …, especially with covit, there was some emergency legislation that was enacted because going back to Trump’s taxes and his, what we call it as net operating losses, as of 2018, if you had a net operating loss, …, you could then only go forward that that mechanism to go backwards if you wanted to was gone. So he only, he only said, listen, let’s just go forward from now on.

Well, because of covit and the carers act, they’re saying, well, you know, everybody’s going to have losses this year. You know, it’s just been a, you know, wildfires and covit, and everything’s shut down. There’s probably going to be a loss. We’re going to allow you to go back. And for this, for this year, you can go back two years if you need to, or you can go. So we want to take a look at what do you think your income is going to be? Are you still in a growing phase? …, are you, do you want to sort of offset income? What there’s, there’s so many circumstances that we want to take a look at what you think you’re going to be at and what, what, how, how much tax you want to pay?

No, it makes sense though. It makes sense. All good. So then when you think about that, right, it’s never too late to tax plan, right? We’re in, we’re going to go into Q4 this week and we’re going to be closing out the tax year, right? …, in what, 90 days or something.

Oh, most people and 99% of our taxpayers are, are on what’s called a calendar year tax basis, which means that it ends December 31st. Some people have audio ends, but yes, for supper, most people were going into the fourth quarter and this is the time to be looking at, you know, …, are we at a loss? Do we need to maybe push off some, some expenses that we can push up to the final year? Because I don’t need, I need, I don’t need any more of a loss this year. I want, I want that expense to be on next year’s tax return. So it’s things that we can look at. Do you need to get rid of cash? Do you need to save cash? Look at,

Yeah, that makes sense. That makes sense. And then, …, you know, but going back to the cares act, we, you and I had had a conversation a few months ago about this depreciation as well. There was a thing about where if you had accumulate or not bonused out all of your depreciation and depreciate your assets down all the way, there was some kind of new mechanism in this omnibus legislation that came out with covit. Could you help us to better understand a little bit of that? Because just before we have into that as a cannabis business owner, you probably have a lot of capital expenditures. You know, you’re building out grows and whole, and, …, the, the spaces for these things, this is something you really, really need to pay attention to because we call the, or you hear these called tax loopholes, but these are tax laws, right? These are real law. It’s not illegal to do this. It’s just having someone on the inside or that knows the law to implement this strategy for you. So if you could help us to add a little color and context to what this depreciation.

Sure. So just for anybody who doesn’t understand appreciation, it’s not, it’s not a free line item deduction, but it’s not one of those deductions or an expense that you can take that you actually write a check there’s no, you don’t write a check to depreciation every month, you know, so it, but it does involve some cashflow issues. It does involve you, you purchased some asset, you know, either by cash or by credit, …, you know, lease it, whatever, whatever it is that you did get that asset. So you did have to outlay money, but then there’s a very legal, you know, mechanism and the tax law called depreciation that you are allowed. It’s completely wonderful. …, especially for, for real estate, …, you may have purchased a piece of property many, many years ago, the cashflow isn’t too horrible on it, but you get this wonderful line item depreciation that reduces the overall income of that particular asset.

So when you purchase something, depending on what you purchase, we have sort of different classes. I’m going to keep it simple. So, you know, good line, good rule of thumb is if you can plug it in, it’s kind of considered machinery. …, and that is sort of depreciated over a five year period. If you buy furniture, fixtures, anything that’s sort of not plugged in, it’s depreciated over a seven year period. And then you have to, you can make the choice. Do I want to fully depreciate this asset? And one year in one fell swoop, or do I want to take it over, you know, a certain amount of years, whoever amount of years it’s allowed. And that’s, again, one of those decisions you have to make, am I going to be making more money in the future? You know, do I want to take more of a loss this year?

So, you know, do I, am I willing to pay more tax next year? So it’s just a lot of things you have to consider. There’s something called lease, hold improvements or tenant improvements. And a lot of our cannabis companies, …, they may either own a building that they’re depreciating, but a lot of these cannabis companies, as you know, they have to have a lot of improvements to the inside to make these rooms perfect for optimum growing purposes. And leasehold improvements are depreciated, what’s called straight lines. So, and it’s usually about 15 years depending or 10, 15 years, depending on what, what the lease is. And it’s a straight line. So, you know, you buy something for a hundred thousand dollars or you spend a hundred thousand dollars in leasehold improvements and that’s depreciated very evenly over that period of time under the cares act, which has never happened before.

They’re saying that you can take that those leasehold improvements, anything that you purchased in either 2019 or 2018 and straight line right off the bat first year depreciation for, for those items. And so, and what’s happening is that if you had a company or you put a lot of leasehold improvements into service in that year, you could actually go back and amend a prior year tax return and get that money back. You have that giant line item. Now the only negative to that, if you want to think of it as a negative, is that you don’t have the depreciation to offset any income in future years, but you may have received a giant check, you know, for a prior year to help get you through these lean times.

Got you. So it was such that you had to depreciate it evenly over 15 years, and now you can do it 100% bonus depreciation in one year or two years and go claw back. Some of that taxable tax income tax that you’ve paid into it. Right? Correct. Got you. So this seems like a good strategy for candidates business owners, because, you know, as startups, most of you that are watching this are probably startups. And I would say startups are something that, …, you know, they, don’t not sophisticated in the financial sense of these things, but what you can do is you can go get all that money back and then build up your war chest to go crush your competition. Right? Correct. As we talked about in our team meeting the businesses that employ a CPA or an EA or someone who knows, or is familiar with the tax law, usually ends up coming out on the other end a little bit better, or significantly better, shall I say, then their counterpart that doesn’t employ this stuff and deploy these types of strategies.

It’s true. I can’t cite any case law or tax law, but it’s known that your, your, if you have a professional preparer in any capacity on your tax returns, the chance of audit is much less than you can do it yourself.

Yeah. That makes sense. I mean, they know that this person is probably this person or this firm is preparing lots of returns. They’ve got data on this person. Has this person been audited that the preparer has this prepared as client’s been audited? So, yeah, because as we talked about audits, you know, how many, like eight months ago we talked about kind of like, if there is a, how would you say an algorithm that looks at a lot of data, but you know, there wasn’t a lot of data for cannabis businesses, but now that we’re hitting the 20 year Mark, you know, over 20 years of legalization in California in 1996 is when it opened up in California. So we’re what 24 years in now for other States, you know, especially in Colorado, you’re five, six, eight years in, or whatever it’s going to be. There’s more data points now that strengthens that algorithm so that you really can’t cheat your taxes in this area anymore. Not that you should be doing that if they’re going to catch up to you, but there’s enough statistically significant data to kick off at least a red flag for a fishing expedition on behalf of the IRS, into your book.

Well, and, and interestingly enough, that’s one of the line items or one of the issues that president Trump is having with his taxes in this current audit. …, you know, when you look at a tax return, you cannot, it’s not a financial statement, so you don’t have backup for each and every line item so that you could have a business and, you know, you have income and then you can have a line of general and administrative expenses. You know, we don’t know what that number is. If I’m looking at a tax return, I don’t know what that number is made up of. And in his particular case, what, …, raised some eyebrows, …, that had them look a little bit further, is that for some of his businesses for a couple of years, his general administrative expense line item went up three times. You know? So in, in other years it was a hundred thousand dollars and all of a sudden it went up to $400,000 with no explanation. You know, what, what, what, what is that? Are you running your personal expenses through there what’s happening? So that’s, that’s what they’re looking at as well.

Gotcha. Gotcha. That makes sense. And, …, with the, you know, the tax return, right, you said, it’s not a financial statement. You have to not have to, but an experienced tax professional would create what we call work papers and essentially it’s their fancy documents to get you to your tax return. Can you tell, …, the, the audits a little bit more about, you know, work papers and why it’s so important to work with a CPA or an EA who knows these types of things, because when you do an audit, they’re going to look at one line item that’s kind of the toe in the door. And they’re going to ask for, you know, records to reconstruct how we got to this.

Sure. Especially with, with cannabis companies, you know, we’re limited to that, …, dreaded 280e. So it’s not necessarily as simple as taking somebody’s profit and loss statement and just sort of, you know, you don’t transferring that to a tax return. There’s all kinds of adjustments that we have to make, make an, a lot of items, simply aren’t deductible. So when we take, we take our, all that, all those receipts and all those numbers, and we make these work papers. So if somebody wants to say, Hey, what’s that general administrative, what what’s in that line item, we can click on that number and we can see, Oh, you know, on October 18th you spent this and on November 17th, it’s this. And it’s, it’s, it’s all of these things that are allowed. And that’s what makes up that, that particular line item. So it’s very important to be organized, but it’s also nice if you’re a layman, say I died and somebody gets audited, horrible case scenario, everything about that was awful, but they could actually take those work papers. And, you know, maybe even a second, I’m not disparaging secretaries, but even like say a secretary could pick it up and say, Oh, that line item is this, this, this, and this here’s your backup.

Gotcha. Anybody with any, without any context of situation can just dive right in peel back the layers of the onion and say, this is how we got to the number. Got you. And that’s the value of having a CPA or an EA prepare your taxes because when you’re creating those work papers, you know, you’re interpreting the tax law for the benefit of the client to put them in the best tax position possible with reasonable methodologies. You’re not just Willy nilly. Like, Oh, we’ll just throw 10% of this. And 80% of that, you know, it’s not like a,

Unfortunately it’s not that simple.

No, there’s some real thought behind it. There’s methodologies behind these. These are, you know, proven tax strategies that have been upheld by tax court decisions. You know, we’ve had to change strategies over the years. I’m sure I’m not privy to any particular client scenario, but I’m sure that there’s been changes in the way that, …, implement certain types of strategies.

Correct. And tax law is always changing. There’s been some, some tax court rulings that have scared us a little bit. So, you know, we’ve sort of taken a way that we’ve done something and maybe changed it a little bit to sort of, to sort of fit into that new tax narrative.

Got you. And also like, as the client, I’m sure the client has some say, right. Do they want to be extremely conservative or do they want to be extremely aggressive? You know, how does the client play into developing their tax planning or their tax filing? Or do they have no say whatsoever?

No, that they do have a say. I mean, we do have clients who are like under no circumstances, do I want to get on it? You know? And, and so we, we play it really, really safe because they want to play it really, really safe. And even things that we’ll say, you know, you can claim this, you know, you spent money on this and this is going to be allowable. And we’re really sure that this we could win. You know, if we went to tax court, Nope. I don’t, I don’t even want to, I don’t even want to chance it, you know, and there are a lot of clients who are like, I want you to go, as far as you can go, I’m willing to pay any tax. If I get audited, I’m willing, able, and ready, you know? So it’s always a mixture.

That makes sense. That makes sense. So yeah, kind of having a team of whatever your internal C-suite team is, plus the green growth team and, you know, you guys collaborate to get to that, …, tax position that they feel comfortable with as a client and you feel comfortable with as a preparer, you know, it’s a joint effort to get to that.

Thanks. Yes. And thankfully, we’ve never been asked to do anything that we have never been, w w we’ve just flat out, refused to do you know, that we’re not comfortable with, we don’t, we don’t feel like this could stand up in court. We’ve never been asked to do anything like that.

That’s good. I mean, as much as clients are vetting us, we vet clients too. You don’t want to take on a high risk type of thing just to get the prepare preparation fee, you know, the risk and reward doesn’t seem, seem the greatest there. So, correct. So final thoughts here. What are some things that cannabis business owners should know about tax planning and taxes? It’s not the sexiest subject. That’s no fun. Everybody kind of fears that day of April 15th or March 15th, you know, what should they be thinking about with tax planning? Is it just a onetime thing? You know, give me some more thoughts on that.

Well, …, that, that’s a good question. Actually. I think that your situation is constantly changing, you know, in February, you know, when I was having Valentine’s day dinner, I could have never imagined that my life would be turned so upside down a month later. And I think everybody’s in the same boat. So everybody’s life and their income and their job changes and it’s fluid throughout the year. So we’re here every single day. So we’re not just going to be here for you. You, you don’t just pay for a tax return and then we’ll see you next year. If you have a question, use us, we’re here all the time. This is what we do. We’re constantly looking at tax law. I mean, it’s, it’s been very interesting, especially in this particular year, all the different tax law that’s come out and we’ve been able to go back to our client and say, Hey, you spent $2 million in leasehold improvements, right? Let’s go back and get some of that money back. So we’re here

All the time. Use us ask questions. That’s what we’re here for. That’s it more than just a one week service. This is an …, You know, lean into us. If you are a cannabis business owner and you want a teammate, that’s always on your team, you know, consider reaching out to GreenGrowth CPAs, you’ve got tax deadlines coming up to your October 15th with a single member LLCs, …, C-corps and personal income taxes here, that’s coming up. So, you know, reach out to us, visit our website at GreenGrowth CPAs dot com in the top right corner. You’re gonna see a get started button, click on that, fill out the form, schedule a time to speak with our team, and let’s get this moving for you. You can plan for the rest of the year, get 2019 tied up then we’ll plan and how we want to get the end of 2020 though, to, to, to end up.

Because once you know, it turns January 1st, you’re pretty much, you know, Sol we can’t go back and change numbers. So be thoughtful. Don’t wait till the last minute. I know it’s not a fun thing to do it now is the time to do it now as a time to think and be strategic about your financial moves for the coming year. Because again, when you get more money back in your taxes, so you don’t have to pay as much taxes, your war chest is bigger. You can go and either buy up your competition or spend more money on marketing to really juice up your business and choose up those returns. So again, visit our website, greengrowthcpas.com or give us a call (800) 674-9050, Natalie. Thank you very much for your time today. I really, really appreciate it. You’re welcome.

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