Tax Tips for Running a Business

Launching a new business is an exciting move. It can be massively rewarding, too, helping you bring your dreams to fruition and affording you incredible financial freedom—if you do it right. While you might have all the expertise you need to run a successful company, you’ll face many financial decisions, the outcome of which can make all the difference to your bottom line.

 Taxes are a critical concern for any business. More particularly for cannabis businesses, as they face inordinately impactful restrictions on what they can and can’t claim as deductions.  Fortunately, with some knowledge and planning, it’s possible to mitigate all that stress so you can get back to doing what you love to do… and we know that’s not taxes!

Top Ten Tax Tips for Cannabis Businesses

Cannabis companies are excluded from deducting certain business expenses, courtesy of Section 280E in the tax code. Section 280E states that any company that trades in illegal substances cannot deduct things like office equipment and expenses, payroll, advertising, insurance, utilities, and business property rental.

What that means is that although cannabis is legal to grow, produce, and sell in most states, it’s still considered an illicit substance for tax purposes. Cannabis companies are, therefore, required to pay tax on non-adjusted income, which results in a much higher tax liability.

Some states have established laws that effectively decouple cannabis businesses from this rule for state taxes. Still, there’s currently no easy way to avoid it at the federal level until such time as cannabis is rescheduled out of its current status as a Class I controlled substance. Until this happens, here are a few tips to support more profits and less stress at tax time!

1.  Choose the right business structure

If you’re starting small or a solo business owner, incorporating your business might result in added expense and complexity. Reporting, documentation, and taxes are much more nuanced and costly for corporations. Speak to an experienced cannabis tax professional before you make any decisions.

2.  Keep your personal and business accounts separate

Cannabis businesses are often subject to more scrutiny than the average small business. Keeping meticulous books is essential as you will need to answer to some regulatory body at some point. Open a business account and use it only for business purposes. Set up utilities and credit cards under the business name, and do not pay business expenses from your personal accounts.

3.  Keep records of all income and expenses

All expenses and income should be tracked and documented so you can report them accurately. Keep track of daily appointments, mileage, and business-related purchases, as you may need them for substantiation if any questions arise.

4.  Understand what you can and can’t write off.

What you can write off depends on the type of cannabis business you operate. However, whether you’re in retail, production, or research, there are certain things you won’t be able to deduct because of 280E. If you’re unsure, check out our article on What Cannabis Companies Need to Know About 280E.

5.  Set aside funds to pay taxes

The best way to ensure you have enough money at tax time is to set aside a little extra specifically for that purpose. Businesses have four quarterly deadlines each year. Allocate a percentage of your income to your tax savings account. If you need advice on how much you should plan for, speak to one of our experts today.

6.  Make charitable contributions

Charitable contributions are tax-deductible and can significantly reduce the amount of tax you owe. If you’re like most people, you’d probably rather donate to a cause you care about vs. giving your hard-earned money to the IRS. It must be an accredited charity, and there are limits on how much you can deduct. The excess can roll over to the following tax year if you exceed the limit.

7.  Purchase equipment

While you can’t deduct typical business expenses like rent and utilities, equipment and tools related to growing, manufacturing, processing, and packaging can be deducted—as can indirect costs for the depreciation, repairs, and maintenance of said equipment. Office equipment does not fall into this category, so computers, point of sale, and software still fall under 280E’s shade.

8.  Cost of goods (COGS) exceptions

Even if you’re not in production, there may be COGS exceptions you can leverage to reduce taxes owed. Costs related to quality control, cleaning, trimming, curing, and inventory may be deductible, as can transportation costs associated with purchasing wholesale products.

9.  Stay informed on changes to cannabis tax laws

Ultimately, the cannabis industry and its taxation are in a nascent state. Advocacy is ongoing, and if the current administration makes good on its campaign promises, we may yet see some movement on rescheduling. Until then, it’s vital to stay informed on cannabis tax laws and any changes that could affect your filing. A cannabis CPA is a trusted source of information on this topic as they are well-versed in the challenges you face.

Final Thoughts

We hope these tax tips have provided good information on preparing your business for tax time. Whether you’re an established cannabis company or a new start-up, good organization and meticulous bookkeeping are essential.

 If you need support or advice on setting your company up for success, we invite you to book a call with us today. Growise works exclusively with cannabis and psychedelics businesses at any stage of maturity, supporting you with tax and accounting expertise to grow on.