Maximizing tax savings for cannabis businesses takes time and expertise. There is a lot to know when it comes to filing taxes for any business. There is even more to know if you are filing taxes as a cannabis business. The cannabis industry has many nuances that are unique, and require special attention. Unfortunately, the IRS doesn’t provide the most detailed guidelines for cannabis business owners to follow.
Saving money on your taxes is more than following practical accounting principles. It starts with proper business practices. Understanding what your cannabis business needs to succeed, and putting those practices in place, helps ensure you’ll be prepared come tax time.
The first few items you should address are the professional services your business needs to be successful in the cannabis industry.
Professional Cannabis Business Services For Success
1. Accounting
To get the most out of your cannabis business tax filings, you’re going to need an experienced cannabis accountant for all of your accounting needs. This includes more than just preparing your annual taxes. Although, proper tax preparation and filing are two of the best ways to save money on taxes as a cannabis business. In order to prepare properly, you’re going to need to handle regular bookkeeping, standard accounting practices, as well as the insight and direction that come from an experienced cannabis accountant. We provide all of these services and more at MI Tax CPA.
2. Attorney
If you’ve been in the cannabis industry long, you’ve most likely heard that it’s more of a compliance business than anything else. Regulations vary by state, and they’re being changed often. Keeping up with the compliance and regulations regarding things like real estate, trademarks, and other intellectual property matters is a must for growing and scaling your business.
3. Security
Security is a top priority in an industry that is still waiting for federal banking laws to catch up. Protecting your cash holdings, whether onsite at the store location, or in transport to another location is very important, but it’s more than just cash. Having the proper security in place to transport, monitor, and protect your inventory is another aspect of security that cannabis business owners need to be prepared for.
4. Consulting
Consultants aren’t entirely necessary if you have someone on your executive team that’s an expert in cannabis licensing requirements. However, that doesn’t mean they aren’t useful. If you don’t have an expert in this area, a consultant who has proven experience and advanced knowledge about the licensing process can increase your chances of getting your cannabis business license. It will also help ensure your cannabis business operations are compliant and current.
These are some of the top ways to prepare your cannabis business for success, and make everything easier when tax season rolls around. The good thing is, many of these roles overlap. A cannabis attorney may be able to help with cannabis licensing consulting. Cannabis accountants can help with cash handling procedures that help protect your bottom line.
Cannabis Taxes You Need To Know
Federal taxes are some of the most tricky when it comes to filing taxes as a cannabis business. In addition to federal taxation, there are three types of taxes that every cannabis business owner should be aware of. These can vary in percentages between states.
1. Sales Taxes
When you sell a product, you’re going to be responsible for sales taxes. These are the regular taxes that have to be paid on the retail sale of goods. These are the same sort of taxes all retail businesses are responsible for. In Michigan, a 6% sales tax is collected from customers when checking out.
2. State Excise Taxes
In addition to paying your required state taxes, businesses that sell cannabis products are required to pay excise taxes that are imposed specifically on cannabis. These excise tax amounts can be as high as 20-35%. Michigan collects a 10% excise tax on all marijuana products. They are collected by the state quarterly.
3. Recreational or Adult-Use Taxes
In states where recreational or adult-use cannabis has been legalized, like in Michigan, there can be additional tax requirements. These taxes are imposed directly on the sale of recreational cannabis and are not the same as those imposed on the sale of medical cannabis. If you’re a business that provides both medical and recreational cannabis, there will be differences in how those sales are taxed.
As you can see so far, there are several nuances that are unique to filing taxes in the cannabis industry. It can be extremely beneficial to hire an accountant with experience in cannabis to keep your taxes well organized throughout the year. This will help you save time and money on your cannabis taxes every year.
Tax Savings Tips for Cannabis Businesses
Now, when it comes to filing your taxes, there are many tax savings tips for cannabis businesses. Some of them are specific to the type of business you are running. Having an accountant who knows the ins and outs of cannabis tax strategies will not only maximize your tax savings but also make sure you’re in compliance with tax laws and other accounting regulations.
1. Internal Revenue Codes (IRC)
Understanding the restrictions and limitations of internal revenue codes can help you save on your taxes. The most notorious internal revenue code for the cannabis industry is IRC 280E. This is the tax code that prohibits businesses that sell cannabis from taking any tax credits or making any deductions for expenses related to cannabis. It sounds super restrictive because it is. However, there are other internal revenue codes, like IRC 471, that allow for certain cannabis inventory accounting methods to be utilized. These methods can help you save a considerable amount of taxes.
2. Essential Bookkeeping
Being diligent with your bookkeeping processes and records is one of the best ways to save taxes as a cannabis business. Clear and concise bookkeeping records make it easier to file taxes at the end of the year. It also provides peace of mind in case you get audited, knowing all of your records are up-to-date and secure. At the same time, proper bookkeeping methods are good for more than just having organized records. They’re essential for maintaining compliance within the tax law, considering the complexities of taxes specific to the cannabis industry.
3. Financial Reviews
It’s an industry best practice to complete regular financial reviews of your business. This accomplishes many tasks that aid in your tax preparation and overall business finances. The process of completing regular financial reviews throughout the year can provide a fresh perspective of your in-house finances. In turn, you will find ways to improve your workflows, increase productivity, and maximize your profits. This will also help your accountant to identify tax strategies to start implementing today, for you to take advantage of tax savings when it’s time to file.
Clearly, there are many factors involved related to tax savings for cannabis businesses. Some of them apply to all cannabis businesses, whereas others are only for specific businesses in the cannabis industry. Hiring an experienced cannabis accountant to guide you through these differences is going to save you time and money on your tax preparation and filling. This will free up your time to focus on other priorities to keep your business growing. It will also put those tax savings back into your business’s pocket, which you can allocate to more important expenses to magnify your business’s success. Contact us today for a free consultation, and get started right away on taking your cannabis business to the next level.
