Cost segregation is a well-known strategy for limiting income tax liability but it is one that remains relatively unknown by many marijuana businesses.
This is unfortunate as cannabis companies have especially onerous tax obligations compared to businesses in traditional industries, owing to marijuana’s federally illegal status.
In this article, we’ll discuss how marijuana companies, and grow operations in particular, stand to benefit from cost segregation. To understand in full how to make use of it though, it is advisable to consult with an accountant or tax strategist with marijuana industry expertise.
What is cost segregation?
Internal Revenue Code 280E defines cost segregation as “the process of identifying personal property assets that are grouped with real property assets and then reallocating those personal property assets for federal tax reporting purposes.”
Put simply, cost segregation may allow you to claim further deductions on your tax return.
Cost segregation is permitted under IRC 280E but the IRS has challenged claims in tax courts on numerous occasions over the years. The good news for marijuana business owners though is that justices regularly rule in favor of the applicant seeking tax relief.
How to benefit from cost segregation as a cannabusiness?
The crux of cost segregation as a marijuana business owner is to reallocate personal property assets classified as real estate property to personal tangible property.
The reason for doing this is that depreciation time for personal tangible assets – five to 15 years – is much faster than for real estate assets – 20 to 40 years. As such, you are able to make depreciation deductions on your tax return a lot sooner.
Which personal property assets qualify for cost segregation?
Personal property assets you use in the operation of your cannabusiness could qualify for cost segregation. These include:
- Grow lights
- Operational costs for electrical, plumbing and security systems
- Climate control systems
- Hydroponic and irrigation systems
Many others could qualify as well, including costs you’ve made for building renovations or refurbishments.
What property types qualify for cost segregation?
The most important criteria for cost segregation is that the building is currently in use and that you have taken ownership of it, either as a buyer or leaseholder.
As mentioned, it helps if you have improved the state of the building through renovations or refurbishments. Additionally, if you have built internal structures necessary for the operation of your business, such as an inventory or a grow room, this could also qualify.
How much could cost segregation save cannabusiness owners?
As an estimate, marijuana business owners that make full use of cost segregation can save between 18 to 30 percent of their facility costs. In the first few years of operating as a marijuana business, this could total hundreds of thousands of dollars.
However, for a comprehensive and accurate understanding of how you could limit your income tax liability as a cannabusiness owner you need to get in touch with an experienced cannabis accountant or finance professional.