Cannabis has increased significantly in popularity in recent years. This is not an industry for the weak-minded and businesses who invest in this industry face stiff competition. The increasing number of cannabis dispensaries, growers, cultivators, wholesalers, and transporters proves that many driven entrepreneurs have taken advantage of this growing industry.
The majority of those who are new to cannabis entrepreneurship are unpleasantly surprised when tax season arrives. The government charges those in the cannabis industry an insanely high amount of taxes to operate and allows little deductions.
It is important that cannabis businesses educate themselves on the laws, tax codes, and loopholes that can save them money on their taxes. There are several deductions that can decrease the amount of taxes owed and make tax season a less stressful time.
Tax Code 280E
Section 280E of the Internal Revenue code denies deductions and tax credits for the money spent or incurred when trafficking controlled substances. This affects the cannabis industry, despite cannabis legalization in many states, because marijuana is still illegal on a federal level.
Because of this code, many of those who work in the cannabis industry are not allowed to claim normal business tax deductions. This is an ongoing legal issue that will hopefully change in the near future.
Many business owners are finding some tax relief through working around these strict laws. There are tax codes that allow business owners to deduct specific items from their expenses, but must be researched for legality.
Resellers and The Cost of Goods Sold (COGS)
The majority of cannabis dispensaries are resellers. Cannabis business owners spend a substantial amount on startup costs and continuous operation costs. There are a large number of expenses incurred in the resale business, including, rent, payroll, products, marketing, etc.
Cannabis operators are allowed to deduct the cost of goods sold. It is often difficult for business owners to understand what this means, and to determine which items they can legally deduct as inventory.
Under the costs of goods sold tax deduction, cannabis resellers are only allowed to claim the direct costs incurred. For the majority of resellers, including dispensaries, this includes the cost of their inventory and transportation costs.
The most common cost of goods sold that can be claimed are costs of labor and materials. These are direct costs that can be claimed industry-wide
Loopholes to Save Money
There are a couple of different tax loopholes that dispensary owners are using to reduce their severe tax burden.
Status Change from Reseller to Processor
Cannabis processors are less severely taxed and are also legally allowed to claim their indirect costs. Many cannabis businesses have taken advantage of the significantly higher tax breaks that are allotted to cannabis processors.
You do not need to have a large organization, an expansive processing plant, or specialized skills to accomplish this. You can qualify your business as a processor if you possess or can obtain, the equipment to extract cannabis compounds, create products such as drops edibles, or complete other in-house manufacturing.
Any time of manufacturing, even adding to an existing product, repackaging it, and selling them, is considered manufacturing. This can result in significant tax breaks if done correctly and legal licenses are in line.
It is easier for business owners to change their status than many are aware. First, check your cannabis license to see if it allows for manufacturing, if not apply for one.
Cannabis Revenue and Expenses
As many who are in the cannabis industry have already discovered, this is a ‘spend money to make money industry. It is not for those who are seeking to make excess revenue quickly and does require diligence for success. This being said, yes, it is likely worth it for your business to make the change from a reseller to a processor. Even if there are additional licenses and fees required.
There are creative ways to technically process marijuana products unique to your dispensary, including:
- Buy loose flower to create edibles.
- Use loose flower and make prerolls in-house.
- Repackage loose flower in brand-specific packaging.
As a business that manufactures and sells cannabis products, you can then claim all the indirect and direct costs of running your business. This will include not only the cost of goods but rent, employees, licensing, etc., making it well worth the investment.
Dividing Your Business
Another method that many are taking is to divide their cannabis business into two separate entities. This allows dispensaries owners to have one business for cannabis sales and a separate business that sells merchandise, services, etc.
This can be tricky and time-consuming, but is wise when purchasing property, claiming deductions, and other tax-related expenses.
Always Consult a Tax Professional
This general tax advice was created to help those who are invested in the cannabis industry to save money. Always consult with your accountant and/or tax professional before making any major financial decisions.
It is wise to find an accountant who is experienced and knowledgeable in the cannabis industry. These professionals will understand the legal ins and outs of the cannabis tax codes, helping you to make legal and practical decisions.
The future is expected to only improve for those invested in the cannabis industry. Despite these strict tax codes, many driven entrepreneurs are successfully opening new marijuana dispensaries and other cannabis operations every day.
Contact Paybotic today if you have a recently opened, or already established cannabis business, and need financial solutions. Paybotic offers their clients intelligent products, services, and the technology needed to offer payment solutions in the cannabis industry.