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Optimizing your Cannabis Business for Income Taxes.



Introduction

Over the past several years, the cannabis industry has seen a massive growth in its popularity and overall business. From medical to recreational use and everything in between, marijuana is becoming more mainstream by the day. Even though it might seem like there are fewer restrictions on this industry (at least in some states), cannabis businesses still face many challenges from federal regulations. One of these challenges, known as 280E, has been particularly problematic for businesses that report high levels of income because they can't take tax deductions or credits on their taxes. This blog will teach you how to optimize your marijuana business income through proper reporting so that you can enjoy all of your deductions as well!


Cannabis Businesses

As a cannabis business owner, you may be wondering why your tax situation is different from others. The answer lies in the Internal Revenue Code 280E.

280E prevents businesses that deal in federally illegal substances from deducting expenses for the sale of the products that they sell. This means that even though cannabis businesses are legal in many states, they still have to pay federal taxes on their income based on gross receipts rather than net profit after expenses have been taken out.


Background of 280E

You might be wondering, “Why are marijuana businesses paying so much in taxes?” The answer is simple: 280E was enacted in 1982 and disallows businesses from deducting the cost of goods sold from their gross income. This means that every state-legal cannabis business is required to report 100% of their gross income as taxable revenue. The IRS has been enforcing this rule for years, but it's not clear whether or not they will ever change it.


State Licensed Cannabis Businesses Are Entitled to Taxpayer Protections

As a cannabis business owner, you can rest assured that your income will be treated legally in the eyes of the IRS. While there are many advantages to operating your business outside of state regulations, there is also one significant disadvantage: if you don’t have an official license from your state government, then you aren’t entitled to any tax deductions or credits.

In order to receive these benefits as a cannabis business owner, it's important that your company is properly licensed by your state government and registered with the IRS under Section 280E of the Internal Revenue Code (IRC). Once this happens, all federal taxes will be calculated in accordance with what they would normally be for other businesses (i.e., net profits minus ordinary expenses).


How to Qualify for 280E Deduction

To qualify for the 280E deduction, your business must:

  • Be a licensed cannabis business that complies with state and local laws.

  • Have a Tax Identification Number (TIN) for your business. This is usually issued by the Internal Revenue Service (IRS).

  • Have an active business license from your state or local government, if required to do so under law or ordinance in order to operate in compliance with federal regulations on cannabis businesses such as those enforced by the Cole Memorandum and its successors (which generally require licensing of marijuana operations; however not all states have implemented these requirements yet). It’s important to note that some states have taken steps towards making it easier for marijuana businesses to remain compliant within their borders without necessarily requiring them to obtain a state-issued license (e.g., California). So make sure you check whether yours does too - sometimes this means just filing paperwork instead!

  • Have an active bank account in good standing at an institution which allows individuals or entities involved with legal cannabis activities access their accounts without fear of losing them due solely upon association with these activities; where possible seek out banks which are dedicated specifically toward serving those needs such as Green Dot Bank (formerly known as Oaksterdam Bank), Safe Harbor Private Bank & Trust Company, among many others listed here: https://www1bz0d0bpv8ncz7m5akc9j9e1hcyvqbq3wfk6xkgx7c5o/us_banks_openly_supporting_cannabis_businesses/. Note: While these institutions may serve as safe havens where you can deposit cash safely so long as you follow all applicable laws pertaining directly thereto including those governing reporting requirements imposed both federally by way of FinCEN along with those imposed locally via AML & SAR filings depending upon where exactly each branch operates within their respective states' jurisdiction(s) some still may require


What Does the IRS Consider a Cost of Goods Sold (COGS)?

A Cost of Goods Sold (COGS) is the cost of producing your product or service. COGS is calculated by adding up all the costs associated with producing a product or service and then subtracting any sales made during that period.

For example, if you were to buy a pound of cannabis from your dispensary for $1,000 and sell it for $2,000 in one month, here’s how you would calculate your COGS:

$1,000 + ($2,000 – $1,000) = $1,500

And this gives us our COGS: $1,500


How to Qualify for the Domestic Production Activities Deduction (DPAD)

The DPAD is an income tax deduction for businesses that produce, transport, import or export certain items. If your business qualifies for the DPAD, you may be able to deduct up to 9% of your gross receipts from domestic production activities.

To qualify for the DPAD:

  • Your business must be engaged in the trade or business of cultivating, producing or manufacturing qualified cannabis products.

  • You must be in compliance with all applicable federal and state laws and regulations.


When you know how to optimize your income tax, you can operate more efficiently.

  • Know your tax obligations.

  • Know the tax benefits available to your business.

  • Take advantage of deductions and credits.

  • Optimize your income tax


Conclusion

Now that you know how to optimize your income tax, you can operate more efficiently. With fewer deductions and credits available, cannabis businesses are finding it harder than ever before to operate their business. That's why it's so important that you take advantage of every opportunity available to keep your business running smoothly and ensure its success!


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