When tax season arrives, it’s better to be over-prepared than under in the cannabis industry. Cannabis businesses, including dispensaries, cultivation sites, product manufacturers, and distributors, are heavily regulated by the United States Internal Revenue Service (IRS). Entrepreneurs who work with hemp paid nearly $3 billion in federal taxes in 2018.
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Hemp-based businesses are more likely to be audited by the IRS, and the cannabis industry is forced to pay taxes in cash until the SAFE Banking Act passes. With the rising popularity of CBD products, the number of opportunities to open a cannabis business is endless. The best way to save money as a hemp business is to determine your tax liability, find deductions, and avoid audits.
Cannabusinesses are subject to the 208E.
The IRS Code 280E is the main reason that cannabis business owners face tax headaches. Companies are forbidden from deducting business expenses for gross income associated with the trafficking of Schedule I or II substances. The federal government still classifies cannabis as a Schedule I substance, despite the passage of the 2018 Farm Bill. Code 280E penalizes cannabis businesses even if they comply with state law. The only deductions that can be made are expenses directly related to making a profit. Cannabis businesses have to pay a gross income tax of up to 70 percent. Failing to dedicate enough attention to tax preparation can result in interest, penalties, and fees.
Hire a professional accountant.
Tax topics aren’t the area of expertise of cannabis entrepreneurs. The smart way to handle the preparation of your return is to hire a tax expert with years of experience with complex tax situations. There are a growing number of Certified Public Accountants (CPAs) who specialize in tax topics in the cannabis industry.
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E-filing state returns is a straightforward and safe way to get the fastest tax refund. Using a popular product for federal tax filing streamlines the preparation of your return and helps you earn a larger refund. Wealth Rocket, a personal finance website, offers a comprehensive overview of TurboTax free Canada and SimpleTax.
SimpleTax is a free tax software with more streamlined features than other tax preparers. The tax preparation software features a maximum refund guarantee, previous tax return access, direct income tax return filing, dynamic calculation of refunds, the best refund optimization for your tax situation, and an RRSP optimizer.
TurboTax is an Intuit tax preparation software that comes with extra features and add-ons. The premium, full-service product has a tiered cost, is NETFILE approved, can auto-fill returns, comes with a mobile app, and comes with reliable customer support.
Square Footage and Rent
Cannabis businesses can earn deductions for square footage and rent. The average dispensary’s square footage is divided 50/50 into sales floor and lobby. Since half of the business is directly connected to the cost of goods, cannabis businesses can deduct 50 percent of the rent. Earning deductions on utilities is tricker, but a tax preparer can offer tax advice and help calculate these.
The IRS closely monitors payroll in the cannabis industry. It’s important for hemp businesses to accurately classify employees based on their roles and responsibilities. If an employee works part-time as a grower and part-time as a budtender, the time spent in cultivation is tax-deductible. Cannabis products can be sold without a budtender, but cultivators are essential to growing setups.
GreenWrap Insurance Solutions offers a range of cannabis insurance solutions that gives business owners peace of mind. They offer general lines coverage at a reasonable price including standard general liability, commercial auto, and intricate D&O of publicly traded companies and private entities. This insurance company offers coverage for medical and life sciences including clinical trials and telemedicine. They can ensure business and individual construction projects, as well as agricultural operations such as grow operations, hemp crop, and machinery and equipment.
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Cannabis businesses need to keep immaculate records. Not only does this help tax professionals find deductions, but it also supports the numbers in the event of an audit. A tax expert can assist with proper record keeping.
Complex tax situations in the cannabis industry make filing taxes a headache. Working with a tax expert with years of tax experience can help you understand your tax situation.