How To Maximize Tax Deductions For Cannabis Business

The federal government is still making it hard to get any tax benefits for your cannabis business.  Advance planning and analysis are essential in the cannabis industry to remain compliant with all federal laws and to maximize your tax savings at the same time.

The Law

The federal government does not allow businesses that sell cannabis to deduct ordinary and necessary expenses incurred to run their businesses from their taxable income. According Greenmarketreport.com. This means that a cannabis business cannot deduct:

  • Depreciation
  • Interest
  • Rent
  • Repairs
  • Salaries and wages

This is the result of the Controlled Substances Act (CSA), which still classifies cannabis as a Schedule I drug that does not have an approved medical use in the US. This remains the case even in states where the sale of marijuana has been legalized for medicinal purposes.

Any Exceptions To The Rule?

There is a significant exception to the rule if you are a producer or reseller of cannabis.  In terms of IRS regulations, firms trafficking in controlled substances are allowed to deduct the direct costs of goods sold, against their income.

Costs Of Goods Sold:

COSTS OF GOODS SOLD 
Opening stock
PLUS Cost of the product (inventory) purchased or produced during the year
MINUS End stock (cost of inventory on hand at the end of the year)
PLUS Direct or indirect production costs

This provision of the IRS represents a significant opportunity for cannabis enterprises, specifically those who only resell cannabis and even more so for those who produce cannabis.

Producers Benefit More

Resellers can only deduct the amount they pay for the purchase of their cannabis stock, AND all transportation and other expenses incurred in acquiring their stock.  Producers can deduct more:

  • Direct material costs for growing product
  • Labor costs for planting, harvesting, and sorting
  • Maintenance
  • Rent
  • Repairs
  • The outlay for plants and seeds
  • Wages and salaries

Producers then are free to deduct many of the expenses that the federal government prohibits cannabis enterprises from deducting. The specific amounts that are deductible are dependent on the specifics of your firm’s inventory costing system. 

Typically Indirect Costs Are Allocated According To Methodologies Including A Standard Amount based On A Fixed Formula
What Does This Mean?
For example, a specific dollar value of indirect costs can be allocated based on a fixed percentage of direct costs

 

Tax Planning For U.S. Cannabis Investors

Tax Planning For U.S. Cannabis Investors

 

Take Note

Recently the tax courts sided with the IRS in determining that cannabis businesses are resellers and not producers. This resulted in the reduction of the costs of goods sold, meaning that fewer deductions are available to offset gross sales.

Only Vertical Integration In The Cannabis Industry Will Bring Significant Tax Advantages

To deduct the additional costs of products sold,  more forms should combine – even through acquisition. Once the entire process is controlled under one roof,  the tax advantages will become significant.

Cannabis remains a complicated industry in respect of tax-compliance, but under guidance from professionals, some strong tax-advantages from business expense deductions can be accessed.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

Contact us for more info about tax strategies for Cannabis  Investors. 

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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