Ensuring your business remains tax compliant is a challenge for every entrepreneur. Failure to do so leaves you vulnerable to an IRS audit and potential resulting penalty charges.
This challenge is especially acute for marijuana business owners though due to the unique nature of the state-legal cannabis industry operating while the federal prohibition of marijuana remains in force.
The conflict between state and federal marijuana laws means canna-businesses have particular tax responsibilities that businesses in traditional industries don’t have to worry about. They are also unable to benefit from many of the tax deductions that businesses in other industries take for granted.
This is because of IRS Tax Code 280E, which prohibits canna-businesses from deducting ordinary business expenses, such as payroll and rent, from their tax bill. Marijuana businesses are only permitted to deduct the Costs of Goods Sold (COGS), which is limited to direct costs incurred from the product being sold. In the case of canna-businesses, this includes costs such as seeds, soil and the upkeep of inventory space.
Unfortunately, this is often overlooked by canna-businesses and can result in unexpected and hefty tax liabilities, as well as unwanted attention from the IRS.
According to Ryan Millam, IRS EA and cannabis tax strategist at Polston Tax Resolution & Accounting, the only way to avoid such nasty surprises is to have a qualified accountant with cannabis industry-specific experience who can “ensure that your business is structured as strategically as possible to maximize the limited deductions cannabis businesses are able to take under 280E.”
Even then, the IRA targets canna-businesses for audits at a much higher rate than traditional businesses since it believes the likelihood of noncompliance, either through negligence or ignorance, is much higher and that therefore there’s more money to be made.
So, even if you are sure that you are making the correct deductions, you need to be able to back this up with your record-keeping or risk losing the right to make any deductions at all.
“Efficient and accurate books are the lifeline of a canna business under audit because they are ultimately what substantiates the cost of goods sold deductions that cannabis businesses are allowed to take as a deduction on their taxes,” Millam said.
“Books that are not compliant have resulted in the disallowance of all deductions for cannabis businesses under audit. This means large tax bills along with penalties and interest owed!”
To make sure you can meet IRS compliancy requirements, Millam recommends that marijuana business owners set up a digital portal that can store and backup all receipts and invoices.
“This also makes it very easy and efficient for the bookkeeper to receive the data needed to keep these books,” he added.
This may all sound daunting as a canna-business owner, but you’re not alone. Recruiting cannabis-specific accounting expertise is an extra cost, but one that is very likely to reap significant dividends when the IRS come calling.
“Most canna business owners did not get into this industry to become tax experts, so at Polston Tax Resolution & Accounting we like to take those burdens off of our clients shoulders so they can focus on growing their business while we keep them compliant,” Millam said.
From bookkeeping, tax filings, sales & excise tax, payroll, tax strategy, to estimated tax payments, finding the right marijuana accountant can save your business money, help you prepare for an IRS audit, and see you through the entire auditing process.