Year-end tax planning is a critical aspect of managing your finances as a cannabis business owner. It allows you to optimize your tax strategy, minimize your tax liability, and protect the wealth you generate from your cannabis business. In this blog post, we will explore the importance of year-end tax planning, provide valuable tips and strategies, and discuss how working with professionals like GreenGrowth CPAs can benefit your cannabis business.
Understanding the Cannabis Tax Landscape
The legalization of cannabis has been a game-changer for the business world. However, cannabis companies still face significant tax burdens, which can complicate end-of-year tax planning.
The federal government still classifies cannabis as a Schedule I controlled substance, which means cannabis companies are subject to the stringent stipulations of Section 280E of the Internal Revenue Code. This section prohibits these companies from deducting common business expenses, resulting in a potentially higher tax liability.
The Essence of Year-End Tax Planning
End-of-year tax planning involves analyzing your business’s financial situation from a tax perspective. The goal is to ensure maximum tax efficiency. This process typically involves timing income and expenses, planning purchases, and considering the size of your income.
Implementing these strategies as soon as possible is critical to your business. Many business decisions cannot be executed at the last second. Once the tax year closes, you can no longer influence your tax liability for that year. Therefore, starting your year-end tax planning early is key.
Why Year-End Tax Planning is Vital
Effective year-end tax planning can potentially reduce your taxable income. This is achieved by delaying certain revenues or increasing spending in the current tax year. Essentially, the goal is to pay the least amount of tax that you are legally required to.
Moreover, tax rates and laws can change from one year to the next. Therefore, understanding potential changes can help direct your tax planning strategy.
Year-End Tax Planning Strategies for Cannabis Businesses
There are several strategies that cannabis businesses can employ as part of their year-end tax planning. These strategies take into account the unique tax landscape that these companies operate in.
Accelerating Expenses
One common strategy involves increasing your spending in the current tax year. This could involve buying capital items like certain types of furniture or machinery, pre-paying your rent for January in December, or even accelerating employee bonuses. Your accounting method plays a role in the best way to implement this type of strategy.
Utilizing 471 allocations/Cost of Goods Sold (COGS)
Cannabis taxpayers can reduce their gross income by considering their Costs of Goods Sold when computing their taxable income. For cannabis producers, COGS can be expansive and include raw materials, direct labor, and various indirect production costs necessary in the production process.
Segregating Businesses
Some cannabis businesses have managed to separate their non-cannabis business from their cannabis business, allowing non-cannabis related expenses to be deductible under federal tax law. This strategy, however, requires careful scrutiny and substantiation of records.
Preparing for Cannabis Business Regulatory Expenses
In addition to planning for taxes, cannabis businesses also need to prepare for regulatory expenses. These can include costs associated with compliance with state and local regulations.
Remember, penalties for non-compliance can be steep. Therefore, including regulatory expenses in your end-of-year tax planning is crucial.
The Electronic Federal Tax Payment System (EFTPS) is a free service provided by the U.S. Department of the Treasury. All C corporations and any company that runs payroll should register for this service.
Checking for Often-Forgotten Tax Breaks
During your year-end tax planning, make sure to check for often-forgotten tax breaks. These can include accelerated depreciation on capital expenditures or pre-paying deductible expenses in December.
Another often-overlooked tax break involves depleting your inventory before the year’s end. This can potentially apply towards your COGS deductions.
Getting Organized
Having your business records and financial statements in order is key to effective tax planning. This includes:
- Business receipts
- Payroll records
- Profit and loss statements
- Records of taxes paid during the year
- Prior year tax returns
Understanding State and Local Taxes
State and local taxes can also significantly impact your tax planning. Each state and municipality has its own laws regarding taxes for cannabis businesses.
Some states, like California, have generated significant cannabis tax revenue. Understanding the tax laws in your state can help inform your tax planning strategy.
Personal Tax Considerations
Your personal tax situation can also impact your year-end tax planning. This can include understanding the implications of the 20% deduction for qualified business income or maximizing the benefits of education expenses.
Getting Professional Help
Year-end tax planning for cannabis businesses can be complex. Therefore, getting help from professionals, like GreenGrowth CPAs, can be beneficial.
GreenGrowth CPAs carry a professional and approachable tone of voice, focusing on empowering clients with informed business decisions. Their communication style emphasizes accessibility, accuracy, and advocacy, offering a sense of security and commitment to business growth.
With a team of experienced professionals, GreenGrowth CPAs can help navigate the complex tax landscape and ensure that your business is well-prepared for the end of the year.
Conclusion
End-of-year tax planning for cannabis businesses is crucial. With the unique tax landscape that these businesses operate in, starting your tax planning early can help ensure maximum tax efficiency.
