Tax law is changing for the benefit of Missouri cannabis businesses with the passing of Missouri Amendment 3, explains the cannabis accounting experts at Smith Patrick CPAs. Not only did this extend cannabis from medical to recreational use, but it also allowed Missouri to decouple from federal regulations regarding IRS Code Section 280E.
The result is significant tax benefits for Missouri cannabis businesses as they can now claim business deductions, including selling expenses, marketing expenses, and corporate overhead.
With adult-use now legal and effective in Missouri, the expectation is that gross revenues would increase for cannabis businesses. If the current cost structure remains consistent, Missouri cannabis businesses should ultimately see more dollars to the bottom line.
"In general, this is a very good thing for Missouri licensed cannabis operators because it allows them to operate under a similar tax environment as any other legal business operating in our state," said David Smith, president of Smith Patrick CPAs and treasurer of the Missouri Cannabis Trade Association.
According to Smith, if a typical dispensary has $500,000 of expenses that are disallowed because of the provision of 280E at the Federal level, the new legislation will save the dispensary approximately $25,000. From a cash flow perspective, cannabis businesses that have paid estimates throughout the year based upon 280E limitations may be getting a sizable tax refund.
The Federal limitation for Section 280E remains in place, which disallows deductions and credits for federally illegal businesses, so these tax changes apply to Missouri state taxes only.
Actions to take
Cannabis businesses need to track all expenses and ensure that accounting practices and systems are robust. In the past decade, the IRS has pursued targeted audits involving cannabis businesses. Now that cannabis operators can deduct expenses on Missouri returns, businesses must be able to support and justify the validity of these expenses with documentation. The easiest way to survive a tax audit is to be prepared in advance.
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