Thinking that only dispensaries have to worry about taxes for their cannabusiness? Think again. Entrepreneurs, processors, and cultivators in the cannabis industry may be subject to taxation, and it’s important for them to understand the complexities around their tax implications.
That’s because the taxation of enterprises that grow, process, and sell cannabis is far more complicated than a basic business filing. To avoid the consequences of filing incorrectly, here are the top three things that cannabusiness entrepreneurs need to know when next year’s tax season rolls around.
Familiarize Yourself with IRC Sec. 280E
IRC Sec. 280 E sets the guidelines for cannabusiness’ taxation. The most critical part of the guidance 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 consists of trafficking in controlled substances, which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” So, what does that mean for cannabusiness owners? Do they have to pay tax on all gross revenue? Yes and no. Inventory creates an advantageous situation for categorizing a number of business costs as Cost of Goods Sold (COGS). This provides an opportunity for these entrepreneurs to benefit from tax deductions under IRC Sec. 471.
Know What Qualifies as COGS
Another way to think of COGS is to basically assess the cost of products necessary for the operation of business. For cannabusiness owners, that can mean the cost of clones and seeds, the cost of flower and trim, and the cost of producing cannabis products like pre-rolls and gummies for consumers. IRC Sec. 147 ensured that these critical costs incurred by cannabusinesses be classified as deductibles for income tax purposes.
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