As the cannabis industry continues to grow and evolve, one of the biggest challenges facing companies in this space is navigating taxes with the Internal Revenue Service (IRS). With the legalization of cannabis in many states and the rise of CBD products, there are unique tax considerations that these companies must address.
The Complexities of Cannabis and CBD Taxes
One of the main challenges for cannabis and CBD companies when it comes to taxes is the fact that marijuana is still classified as a Schedule I drug at the federal level. This means that it is considered illegal and has no accepted medical use. As a result, these companies are not able to take advantage of many tax deductions and credits that are available to other businesses.
Additionally, cannabis and CBD companies face a unique tax code known as Section 280E. This section prohibits businesses from deducting any expenses related to the sale of illegal substances, including marijuana. This means that these companies cannot deduct expenses such as rent, employee salaries, or marketing costs, which can significantly impact their bottom line.
Strategies for Dealing with Taxes
Despite these challenges, there are strategies that cannabis and CBD companies can use to navigate taxes with the IRS.
Proper Accounting Practices
According to the Dennis Sanders, CEO of Burning Daily, the first step for any cannabis or CBD company is to ensure that they have proper accounting practices in place. This includes keeping detailed records of all income and expenses, as well as separating any activities related to marijuana from those related to CBD. By having accurate and organized financial records, these companies can better demonstrate their compliance with tax laws.
Maximizing Cost of Goods Sold (COGS)
One way for cannabis and CBD companies to reduce their tax burden is by maximizing their COGS. This includes including all direct costs associated with producing and selling their products, such as the cost of raw materials, labor, and packaging. By properly calculating and documenting their COGS, these companies can reduce their taxable income and potentially lower their tax liability.
Utilizing Tax Credits
While cannabis and CBD companies may not be able to take advantage of many tax deductions, there are still some tax credits available to them. For example, businesses that engage in research and development activities related to cannabis or CBD may be eligible for the Research and Development Tax Credit. Additionally, companies that hire individuals from certain targeted groups, such as veterans or individuals with disabilities, may be eligible for the Work Opportunity Tax Credit.
Forming a Holding Company
Another strategy for dealing with taxes is for cannabis and CBD companies to form a holding company. This involves creating a separate entity that holds the assets of the business, while a separate operating company handles day-to-day operations. By separating the assets from the operations, the holding company can take advantage of tax deductions and credits that are not available to the operating company.
The Importance of Working with Experts
Given the complexities of taxes for cannabis and CBD companies, it is crucial for these businesses to work with experts who have experience in this industry. This includes accountants, tax attorneys, and other professionals who understand the unique challenges facing these companies.
These experts can help businesses navigate the ever-changing tax landscape and ensure that they are in compliance with all applicable laws and regulations. They can also provide valuable advice on strategies for minimizing taxes and maximizing deductions and credits.
The Future of Cannabis and CBD Taxes
As the cannabis industry continues to grow and gain acceptance, there is hope that the tax landscape will also evolve. In fact, there have been efforts at the federal level to change the tax code to allow cannabis companies to take advantage of deductions and credits that are currently unavailable to them.
Additionally, as more states legalize marijuana and CBD, there may be more consistency in tax laws across the country. This could make it easier for businesses to navigate taxes and reduce the burden of compliance.
Dealing with taxes is a significant challenge for cannabis and CBD companies, but it is not insurmountable. By utilizing proper accounting practices, maximizing COGS, and working with experts, these businesses can navigate the complexities of the tax code and minimize their tax liability. As the industry continues to evolve, it is essential for companies to stay informed and adapt to any changes in tax laws and regulations.