One thing is for certain – this is an extremely important tax consideration and one that will likely get challenged should you ever be audited by the IRS. Let the experts guide you here – this is often done hand-in-hand with Entity Structuring though some clients come to us wondering if existing entities qualify as cannabis/non-cannabis. Polston Tax Resolution and Accounting professionals are constantly trained and educated on current and upcoming cannabis taxes and regulations to help your business maintain compliance. We can help structure your cannabis company and provide you with ongoing accounting services to not only save you money, but mitigate an IRS cannabis audit. adjusting entries We offer cannabis accounting services to the states of Missouri, Nevada, and Oklahoma.

How to Maximize Marijuana Tax Deductions

Painting an accurate picture of your operating budget and cash flow projections helps you understand whether the business is on-track and what might cause disruption. When managing multiple locations in multiple states, of course those compliance filings add up quickly. Our work with MSOs often involves creating different entities in each state to avoid comingling issues like tax compliance and licensing requirements. When a range of entities are involved, these filing requirements can compound even further. Certain state compliance requirements may also dictate what costs are allowable in cost of goods sold.

Do Dispensaries Pay Federal Taxes?

• Some states, like Oregon, favor lower taxes to foster competition, while others, like California, impose high rates that challenge profitability.
• Understanding the nuances of Section 280E is crucial for optimizing tax strategies and ensuring compliance.
• This is because an employee who works part-time as a cultivator will fall under a different tax code than a part-time budtender.
• Under federal law, Marijuana is a Schedule I controlled substance, making it illegal.
• Cash management practices can help businesses maintain financial stability and avoid potential issues arising from tax obligations exceeding available funds.
• The best laid plans may come undone, but no plan at all is sure to leave you at higher risk.

On top of federal taxes, cannabis businesses also have to contend with many state and local taxes. These can vary significantly from state to state, including sales, excise, and specific cannabis taxes. For instance, in California, cannabis businesses pay a cultivation tax on flowers and leaves, a 15% excise tax on retail sales, and a state retail sales tax, among others. Colorado has a state sales tax on in-store sales, a state retail marijuana sales tax, an excise tax on wholesale sales or transfers, and a potential local option retail tax. As mentioned earlier, accurate record-keeping is critical for all cannabis businesses, including processors, to ensure compliance with state and federal regulations and minimize their tax liability. Processors must keep detailed records of all expenses related to production, such as equipment, raw materials, labor costs, and rent.

Maximizing Cost of Goods Sold Deductions

The state imposes a 12% retail sales excise tax that increases annually starting in 2025 to a total of 18% in 2030. The Cannabis Control Division of the Regulation and Licensing Department will be responsible for licensing and collecting taxes. Given the current state of rescheduling and the recent uncertain tax positions taken by leading MSOs, AAFCPAs is well-positioned to advise clients on the pros and cons of a non-IRC 280E approach.

• There is a 6% tax on retail sales for recreational use at dispensary facilities and a 4% tax on retail sales for medical use.
• Employees’ activities determine whether their labor is deductible (allocable to COGS) or non-deductible.
• The Washington State Liquor and Cannabis Board handles licensing, tracking and taxes.
• These business owners should be aware that non-filers are an IRS enforcement priority.

By staying informed and proactive, cannabis businesses can survive cannabis accounting and thrive in this evolving industry. While the current tax regime poses significant challenges for cannabis businesses, there are opportunities for reform and improvement. Maintaining consistency in accounting methods is a fundamental principle in financial reporting and tax planning. For cannabis businesses contemplating the shift from expensing to capitalizing and amortizing significant costs like advertising, this principle holds considerable weight. Once a business decides to capitalize and amortize its advertising expenses, it sets a precedent that should ideally be followed in subsequent tax years to ensure consistency and transparency in its financial statements.

• And using cloud-based platforms can enable seamless documentation and real-time collaboration between the firm and its clients.
• With more than a decade of experience, our team provides tailored solutions to help you optimize financial strategies and comply with evolving federal and state regulations.
• For instance, establishing separate entities for cultivation and retail operations may provide more favorable tax treatment under certain circumstances.
• Our years of experience have allowed us to appreciate different business perspectives and client needs, which we leverage to provide tailored services.
• In recent years, there have been two notable cases that have called into question the constitutionality of Section 280E and its application to the cannabis industry.

• When you partner with Polston Tax Resolution and Accounting, we strive to get to know our clients and foster a long-standing relationship.
• Let the experts guide you here – this is often done hand-in-hand with Entity Structuring though some clients come to us wondering if existing entities qualify as cannabis/non-cannabis.
• To prepare for a potential rescheduling, operators should consider filing protective claims, which safeguard the ability to claim refunds once rescheduling happens.
• I have done three of these types of events over the last year, and what I have heard is a genuine desire to comply with the tax laws regarding the industry.
• “If we strive to be good humans first, we can extend a hand, partner, and lift each other up.
• Our cannabis CPA firm provides effective IRS audit review, preparation, and even representation services.

Secondly, it aids in accurate financial forecasting and planning, giving business owners and investors a reliable picture of long-term financial commitments and potential tax savings. This is achieved by delaying certain revenues or increasing spending in the current tax year. Essentially, the law firm chart of accounts goal is to pay the least amount of tax that you are legally required to. Cannabis processors require specialized equipment for their operations, such as extraction machines, ovens, and packaging equipment.