Cannabis Knowledge & Insights

Use New Tax Cuts to Lower Your Cannabis Business Tax Burden & Minimize 280E

Continue reading here, and watch our video on ways to Use New Tax Cuts to Lower Your Cannabis Business Tax Burden & Minimize 280E.

Welcome everyone I see some people are starting to come in my name is Derek I’m a CPA founder at GreenGrowth CPAs and we’re really excited to have everyone on the call today currently we are a full-service CPA firm so audit tax advisory we have been in the industry now for close to five years we recently received approval this past week from The Canadian Board of Accountancy so we’re really really excited about that we have about half a dozen IPOs that were working on for a canvas related clients so we can do the full Auditor both in the United States as well as in Canada so for any of you who are interested in going public this year in Canada it’s a really good time to raise capital hey crystal and meat from Brea California we’re right down the street from you were actually based out of Central Los Angeles so we are right across street from the growth nice hey Donna from Sebastian pool Greg’s to you hey Josh welcome from Sacramento we love Sacramento we have a few dispensary related clients out there a great place to be all right guys we are about to start the webinar now we are insanely excited to talk about the new changes in the tax laws that will be affecting your cannabis business because we are in taxis in time this is probably the most relevant time to learn about taxes obviously no one wants to learn about taxes outside of tax season but now that we are in tax season it’s really important that you guys understand what the new changes in the tax codes are so you are not overpaying your taxes a little bit about us we are green growth CPAs we probably prepared close to 1200 tax returns by now well over a thousand and we’ve done returns in all verticals dispensary distribution cultivation manufacturing delivery and testing we have about 350 clients spread throughout 11 legal states we just closed Missouri about three weeks ago so we’re really excited to have clients out in Missouri and we’re also working on a few Hawaii deals which would be our 12th state we have done at least 12 audit and valuation related projects in 2018 and 2019 and we hit seven figures in revenues last year so that was 2018 that was our second full year business so we’ve experienced a tremendous growth and we’re really grateful for all of the opportunities that are presented to us we have a thorough and deep understanding of tax compliance and assurance related to the cannabis industry pretty much anything that’s boring will do for you just a quick reminder and I’m sorry but our lawyers make us say this but the information contained in this webinar presentation is meant for guidance purposes only and is not construed as professional or legal or tax advice further it doesn’t give any personal tax advice or investment advice in any manner this is simply for discussion and general points so the agenda for today is we will identify and talk about the new changes in the tax codes that will be taking effect on this year’s income tax return specifically we’ll be talking about filing form 1120 which is C corpse will talk about the section 199 a qualified business deduction income which is without a doubt one of the best deductions that a cannabis operator could potentially take and lastly we’ll talk about tax code 280 E which affects all Schedule one cannabis related companies lastly we’ll also talk about how these changes in the tax code can affect your cannabis business based on the ownership entity structure and we’ll talk about strategies to maximize these changes and also use them to your benefit to help make sure that you’re not overpaying either the state or federal government so the change is in the tax law affecting that are taking effect this year the first one we want to talk about is form 1120 which is applicable for C corporations the best thing that happened is that the tax rate for C corpse is fixed at a 21% flat tax rate so whether you’re making $100,000 or 100 million you will be subject to 21% tax rate irrespective of how much money your company makes this is different from prior years such that it was a tiered structure so the more money your corporation made the more taxes you had to pay so having a flat tax rate is an awesome benefit of being a C Corp however you still will be subject to double taxation so it’s important to remember that the second point that we want to talk about is the section 199 a qualified business income deduction and these are not structured as see corpse so if you’re an LLC S corp or partnership you will be able to take up to a 20% top line deduction on your individual tax return so this is an awesome deduction if you are a pass-through entity so how this works is is let’s say you have $100,000 in pass-through income and you take that on your return you could potentially write off $20,000 off the bat simply because of this new qualified business deduction income so it’s a fantastic opportunity to be able to take solid deductions for really no apparent reason other than this is the new tax code change there’s some specifics to the section one and a qualified business deduction income and there are some specific things that you need to be aware of as a cannabis operator unfortunately according to tax code 280e you cannot take any deductions or credits when you are engaged in a schedule 1 controlled substance activity so this deduction is not available to cannabis operators what we’ve seen in terms of great tax strategies from our clients is that they’ll oftentimes set up various operating entities you know they’ll set up an asset management company they’ll set up a leasehold company and those companies will be structured as a pass-through entity and oftentimes those companies may be able to take advantage of the section 109 a qualified business income deduction so you know it’s really important that you work with a competent and qualified CPA and lawyer to ensure that you’re structuring your entities in a way that can maximize these deductions while also following all the applicable rules the section 199 a qualified business deduction income also gives qualified agriculture and horticulture cooperatives the opportunity to take advantage of the 20% top-line business income this is also applicable to any qualified real estate investment trusts so they’re often times referred to as a REITs and many other qualified publicly traded partnership business income the calculations for the 199 a business deduction income can be a little bit tricky there are new seven tax rates on the personal level so what are the new personal income tax rate levels it’s 10 percent 12 percent 20 two percent twenty four percent thirty two percent thirty five percent and thirty seven percent if you make too much money you may not be able to take all the section one and nine a qualified business income deduction so it’s really important that you understand which deduction you can take on your AGI also known as your adjusted gross income that will not allow you to be subject to phase-outs pretty much what the phase-out to mean is the government is trying to say hey you make too much money and you’re taking advantage of too many tax breaks so irrespective of the tax code you will be subject to minimum tax they’re also commonly referred to as AM T’s alternative minimum tax is so it’s really important that when you’re working through your income tax return you’re working with someone competent who understands the ins and outs and is able to navigate you through the various tax law changes so you’re reporting your income correctly but you’re also reporting it in such a way that will help you take advantage of the tax breaks here’s a basic chart of tax savings from the section 199 a deduction by marginal rates so for example if you are in the 10% rate for every ten thousand dollars a pass-through income you can take off $200 whereas if you’re at the top marginal tax rate thirty-seven percent every ten thousand dollars a pass-through income so what is pass-through income it’s income that comes on a k1 that is either from an LLC or an S Corp you can take up to seven hundred and forty dollars so you know there’s great potential tax saving advantages of section 109 a so it’s really important that you not only classify your income appropriately will you make sure that you know where you’re putting it on the forms to take advantage of the tax code changes so calculating the 1099 tax savings through one ninety nine Abe so someone who’s in a ten percent tax bracket will save two hundred dollars and this is dollar for dollar on every ten thousand dollars to pass through income and this is just a general example so you guys get a feel for what the savings are obviously each tax situation is specific to that individual but we want to give you rough dollar amounts for how much this new tax break can actually reduce each dollar that you owe whereas someone who’s in 37 percent tax bracket will save about 740 dollars that’s an actual taxes not deduction for $10,000 a pass-through income there’s a difference between tax deductions and actual tax savings what we’re talking about here is actual money that you would have to pay to the government that you now don’t because of this new tax savings code so it’s really important that you know you understand how your cannabis business is being structured and also how to take advantage of this tax code ruling and also making sure that if you are a high income earner and your cannabis business is blowing up that you aren’t subject to am teased or potential phase-outs there’s a couple strategies to maximize the $1.99 a qualified business income deduction and those are putting assets and separate service lines potentially and then maximizing your wages paid employees there are specific phase-outs or the $1.99 a based on the w2 payroll so you want to make sure that you maximize your w-2 wages paid to employees to maximize this deduction so what we mean by putting assets in a separate service company such as a property company or an asset holding company is let’s say for example you have a 10 million dollar cannabis business in Los Angeles downtown LA but you own the building which is worth seven million dollars in a separate entity which is a LLC and you also have all the assets in that LLC as well so what are assets your grow lights you grow build-out all of the machinery and equipment that you use on a day-to-day basis so you know if you’re doing volatile extraction it’s your co2 machine you know all the Associated assets that you use in the business you put that as well as a property and a separate company and then the cannabis business will then pay let’s say a million bucks every month to the asset company for use of rent as well as use of the equipment and then under that situation you can oftentimes potentially take advantage of the $1.99 a all that being said you want to make sure that you check with your CPA as well as you check with your lawyer to make sure what you’re doing abides by the rules and regulations and you’re not skirt tailing any potential regs so 280e we beat this issue over the head many many times but pretty much it is a federal tax code that does not allow a cannabis operator to take sales and marketing related expenses quick caveat according to the new hemp farm bill hemp which has its very specific definitions is now no longer on a Schedule one substance I believe will move to schedule five so you will now not be subject to 280e if you are specifically a hemp farmer of course though what I hear from our clients though is that hemp is not as beneficial in terms of CBD extract as potentially CBD derived from the sativa cannabis stalk of course I’m no farmer and this slide deck will not talk about for me but you know make sure that you know where you qualify and making sure that you have a CPA that’s competent and understands your business to be able to classify what where your income show fall and what deductions your company is can potentially take advantage of so here’s a basic example of an ordinary business in the cannabis related to business the main point to focus on is the bottom line which is taxes at 35 percent this is a aggregate tax rate so this includes you know your your state if you live in a state that has stated income tax and and all the taxes across the board you can tell by this example that the cannabis business pays a dramatic higher amount of taxes than a normal business would you know roughly we’ve seen anywhere between five to seven times the amount of taxes normal business will pay a cannabis business is subject to so it’s really important that you understand what tax code your business is subject to and making sure it’s being filed appropriately the tax code is so much higher for the cannabis business because sgna is not allowed to be deducted under the cannabis business word is under the ordinary business so it’s really important to understand that sgna unfortunately is a non deductible expense and you’re gonna be taxed at the gross profit level which is obviously much higher than the net income level in SGA stands for sales and general administrative which is pretty much all your overhead expenses so SGA it really comes down to your marketing expense your payroll expense your rent you know your supplies anything that your business incurred that does not directly benefit or is attributable to your making a product cost of goods sold is your best as a cannabis-related company it’s the direct and indirect costs that go into producing the goods or services that you plan on selling since your cannabis business is not treated like any other legal business the cost of goods sold is the only deduction that you could potentially take so when filing your income tax return making sure that you understand what can reasonably be classified its cost of goods sold and what’s reasonably classified is the sales and marketing expense is insanely important because that will then dictate how much taxes you pay here a couple examples of cost of goods sold and allowable deductions so things you can potentially deduct is the products the product packaging the invoices for the cannabis sales less any other trader business’s electricity bill which is obviously very high for indoor cannabis cultivators indoor water bills which is also can be potentially high for cannabis farmers and things that you potentially cannot deduct or payroll expenses office supplies your we map expenses if you advertise on WE maps and any other related marketing and promotional expenses are generally not deductible how to best maximize your cost of goods sold be very very specific in the job descriptions and the activities of your employee so for example this is where employee manuals become very important in the IRS talk tax audit if an IRS agent comes and tells you that 90 percent of all your bud tendered expenses our sales and marketing related they’re gonna disallow 90 percent of their payroll whereas if you have very robust employee manuals that shows that you know the bud tender will spend 50 percent of their time selling the product and the other 50 percent of the time working with vendors on bringing in new new products you can reasonably argue that 50 percent of their payroll should be deductible because they’re not engaging in sales related activities they’re also engaging with vendors to bring on new products which is generally a cost of goods sold expense so it’s really important you have very specific job descriptions and you have all the documentation that can back it up and of course you know if you need help with creating these documents we’d be thrilled to help you what’s also very important is including the square footage of your facility and how every single square footage will relate to your business so for example if you do co2 extraction you want to make sure that the bulk of your processing facility is documented and it shows that you know out of the 10,000 square foot you have 9,500 square feet relates to co2 extraction and this will definitely help you and the tax auditor identify what is allocated to cost a good sold and what’s allocated to sales and marketing another really good way and this is very easy way to maximize your cost of goods sold is to keep track of all your receipts and/or all your bank statements in this day and age it’s impossible to keep track of every single receipt so at least have been clear digital records is probably the most important thing that you can do to substantiate your expenses with the IRS will often do is they’ll go back and audit you know three or four years ago let’s say 2015 2014 and they’ll go back to those years because they know that oftentimes cannabis operators don’t have proper records dating that long ago so it’s really easy for them to say well if you don’t have any backup documentation for your expenses we’re gonna disallow all your expenses and it’s terrible because they’re pretty much gonna assess attacks at the top line of what you earn so if you you know your dispenser that does two million dollars they’re gonna multiply that by potentially thirty five percent and then those are the taxes that you have to pay so it’s insane they’ll also go back to early years so they can assess penalties and interest on each month that you underpaid so you know when they go back to such early years oftentimes the penalties and interest will far outweigh the additional taxes that they’re trying to make you pay the second thing that you can easily do to maximize your cost of goods sold is just simply knowing what all of the taxes that your company is owes and making sure you’re classifying your income and your expenses appropriately and the reason why we’re discussing cannabis tax audits in so much detail today is because what we’re seeing from our tax lawyers out of Colorado that we do a lot of work with is that the audit rate coming out of Colorado is close to between eighteen and twenty one percent based on antidotal insight that is a really really high percentage generally speaking corporations are being audited at anywhere between one to three percent but as you can tell cannabis operators are disproportionately being targeted and it’s very easy to find a cannabis tax all you have to do is match the ein on their state license app with the ein on the return so they’re really easy tax returns to pick off so it’s really important that you make sure you’re working with someone competent and you’re also keeping all your backup records some last cost of goods sold best practices is creating separate general ledger accounts specifically for your cost of goods sold set up a system of checks and balances for verifying that all the cash flow ties back to your general Ledger’s setting up internal controls to prevent fraud and theft which unfortunately is very rampant in this space and the last thing you could do is making sure you reconcile your general ledger with the account transactions and keeping a strong paper trail with receipts signed by vendors and also the pay slips signed by the employees so some key takeaways from this presentation is cannabis business owner and these could benefit actually from the new tax law it’s you know oftentimes with taking into consideration 280e it just seems all bad but there’s actually some good things under the new tax law and understanding how to report the numbers and itemizing deductions is really the key advantage of taking advantage of the new tax law so with that if you want to make sure to maximize your cannabis business taxes in 2018 please feel free to contact us we’d be thrilled to help you in any way we can so please reach out to us either at green growth CPAs com or give us a call at our 800 number which is one eight hundred 676