April is Tax Season, Even for Cannabis
March 29, 2017
It’s almost April, and for the cannabis industry that means one thing – Taxes. For most companies, this time of year is stressful, but it can be devastating for cannabis business owners, especially if this is their first year in business. While a typical business pays an average effective tax rate of around 19.8%, cannabis businesses have reported paying an effective tax rate over 50%, with some claiming up to 70%.
So why is there such a disparity? In 1982, Congress added Section 280e to the U.S. Tax Code. 280e states:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Simply stated, cannabis business owners can’t take standard deductions because cannabis is federally illegal. Some may question, why pay taxes on income that the Federal Government has deemed illegal? Because the IRS does not differentiate between legal and illegal sources, any and all income is subject to tax. Under the 16th Amendment, Congress has the authority to lay and collect taxes on income, clearly stating “from whatever source derived”. For those wondering, expenses that can be attributed to non-illegal activity, like Software as a Service for inventory tracking, can be deducted.
Disallowing deductions can be costly. For example, a dispensary is precluded from writing off things like rent, insurance, utility bills, and employee wages. Anyone who has operated their own business knows that those categories are the bulk of their expenses, and tax write-offs can be the difference between another year in business or shutting the doors.
Businesses may deduct the Cost of Goods Sold (C.O.G.S.) but are given little guidance on how to calculate legal deductions. The most common method relies on recording and deducting costs attributed to cannabis labor, be it time spent consulting patients of clipping clones. A 2014 document released by the IRS provides more information but is careful to state that the advice “may not be used or cited as evidence”.
The following BioTrackTHC Reports are available to help you file your Federal Business taxes:
- Complex Sales Report– Displays Wholesale totals, Wholesale Tax, C.O.G.S., Sales totals, Sales Tax, cash collected, Profit Margin, discounts applied, and Payouts
- Inventory Transfers Report– Displays Wholesale Financial Statements for all the incoming and outgoing products
- Tax Breakdown Report– Displays all the tax that was collected for each different tax rate in the system, as well as the breakdown of each different tax breakdown type for each tax rate with how much was collected for each different tax breakdown type.
To access BioTrackTHC Reports, select the Reports Tab and locate the desired report from the available drop down (Complex Sales is under Sales, Inventory Transfer is under Inventory and Tax Breakdown is under Miscellaneous). Next, adjust the date range to view the desired reporting dates and click View; if you didn’t update Method, this will become an HTML file and will pop up in your web browser. To export to CSV, select the “Method” dropdown, select “Spreadsheet” and then click view report. Once you see your report in BioTrackTHC, you can now click export to download the CSV and open it with any spreadsheet/CSV program.
For any questions, concerns, or to receive assistance in setting this up, contact our training team today.