Cannabis Business Tax Guide

Filing taxes as a cannabis business owner is a throbbing headache due to state and IRS agents leaving no stone unturned when searching for reasons to penalize the non-compliant. Keep your business above board and lucrative with MI Tax CPA’s cannabis accounting services. We offer our clients a free consultation to discuss our tax and accounting services.

Call today and let us put your tax season migraines behind you!

Nothing is Certain with Cannabis and Taxes

We have seen the evolution of medical marijuana being legally approved to certain states approving marijuana recreationally. The teeter-totter of will they/won’t they fully decriminalize marijuana leaves cannabis business owners in a bind when legally operating and filing taxes in the ever-shifting climate.

Although marijuana is prohibited under federal law, medical and recreational marijuana is legal and taxed in Michigan. There are currently three types of marijuana taxes:

• Sales tax 
• Excise tax
• Income tax

The retail sales of marijuana and marijuana-derived products are subject to sales tax (usually collected from the consumer at purchase) and adult-use or recreational use is subject to an excise tax of 10% in addition to the aforementioned sales tax. Furthermore, cannabis businesses are required to file a tax return with the IRS. Using the incorrect forms when filing your taxes can cause your return to get rejected.

MI Tax CPA is here to represent our clients and help dig into the intricate tax code, ensuring that our clients have their taxes handled properly without paying more than necessary.

Prepare Your Documentation

Be sure to gather all the documents required for determining how much you owe in taxes. You will need to collect:

• Business receipts
• Payroll records
• Profit and loss statements
• Records of any taxes that were paid during the year

The next step is to calculate your total income. When filing your taxes, come prepared with information about all of your sources of income, such as:

• Gross receipts (income without any deductions)
• Returns and allowances (the more tax allowances you claim, the less income tax will be withheld from your paycheck)
• Business checking/savings account interest (1099-INT or statement), etc.

Deductions

Driving forward, you must calculate your expenses. We recommend keeping a record of all of your expenses throughout the year. 

Section 280E

Cannabis business owners must operate differently due to Internal Revenue Code Section 280E. Section 280E prohibits cannabis businesses and their owners from taking tax credits or making deductions for expenses related to the buying and selling of Schedule I and Schedule II controlled substances. Marijuana is a Schedule I substance and selling it technically falls under the category of drug trafficking.

This classification means that you will be unable to deduct normal business expenses, even though your business operation is in a state where it is legal to sell marijuana.

You must pay taxes, but you cannot take federal deductions. This is the largest risk when it comes to audits (official inspection by state and IRS agents), and without the proper guidance, cannabis businesses suffer.

The only option is to determine cost of goods sold (how much you spent producing the product) and deduct that from your expenses (labor, materials, shipping, etc.). Be forewarned that the cost of goods sold usually only applies to purchases that are related to the product, or planting, such as seeds, soil, and nutrients. In a typical business model, the costs of goods sold are deducted from your gross receipts, and this equation results in your total profit for the year.

Grow and processing centers have the advantage here because they have so many other deductions that can be allocated towards cost of goods sold such as rent, utilities, payroll, etc. Provision centers only have the actual cost of the product, and maybe some freight-in. 

To avoid violations in this new marketplace, a professional aide is necessary. Contact our qualified CPAs who will work tirelessly to ensure that every avenue for reducing your taxes is explored.

Send Your Employees, Contractors, and the IRS Documentation

Send three copies of the W-2 form (a document that records employee earnings and tax withholdings for the year) to your employees. Your independent contractors need to be sent their 1099-MISC (a document that records how much pay they received for the year). These documents are annually due by January 31.

Audits

The IRS and state Departments of Revenue specifically target cannabis businesses because they are largely cash-based. To survive these audits, you must maintain immaculate records of your income and expenses. It is good business practice to keep your records for approximately seven years.

MI Tax CPA can help you emerge from audits unscathed.

Contact MI Tax CPA Today!

When sitting down to wrangle tax season, no one wants to see their taxes be greater than their income. The marijuana business is relatively new, making it an exciting endeavor full of potential growth. It is also potentially rife with mistakes as a cannabis business does not file taxes the same way as other small businesses and routinely ends up paying triple the tax rates in comparison.

MI Tax CPA is ready to help you avoid missteps by assisting your business with our tax and accounting CPA services. Call today for a free consultation about your cannabis business!