Cannabis Accounting & Finance Management for Tax Purposes
Cannabis businesses are no different. However, because of Federal Law even more detailed records are necessary, whether you are growing, buying or selling.
Building financial accounts for your cannabis business can be puzzling, especially with the limitations of Internal Revenue Code 280E. NestEggg’s Cannabis Compliant Accounting & Tax ensures that financial records aren’t too complex to understand, yet remain compliant for federal and State tax purposes, while also providing pertinent and useful financial data.
- Misunderstanding 1: Marijuana dispensaries are not federally approved, so they are not subject to income taxes here. Although not federally approved, all marijuana dispensaries are not eligible for IRS tax exemption. For this reason, they are subject to income tax filing and payment. It is safe to assume that all business income will be subject to taxation, unless stated otherwise.
- Misunderstanding 2: Marijuana businesses are filed under 501(c) non-profit tax code here. This is not your standard non-profit business, this is all marijuana, illegal under federal law.
- Misunderstanding 3: I can claim business expenses like rent, bills and salaries for running my marijuana business here. Under the Tax Code, expenses connected with the illegal sale of drugs are disallowed. Since marijuana is illegal under federal law, you cannot claim expenses, however regulations under 280E allow certain Cost of Goods Sold to be expensed.
A common problem with any business is setting up too many different accounts when establishing accounting records. The easiest observation is to think about it in a “simplistic” way. Accounts are either Income or Expense. Start simple and add more accounts as your business evolves, depending on your businesses structure.
Making the right decision is essential. Know who you are hiring (background checks help with this) and what type of software will be used to keep your business records and how experienced they are with that software. Some states require traceability software. Make sure this software can either integrate with or can support your accounting and Point of Sale (POS) systems. Know how the POS tracks what you have sold (down to the individual product) and how it will report to your business a general accounting method.
Some suggested initial accounts to be set up are, Starts (clones, seeds, plant tissue), Edibles, Concentrates, and Paraphernalia to remain compliant. If you produce (or grow), separate the expense accounts for your Cost of Goods Sold (COGS). COGS represents anything relating to the growing of your product here: soil, nutrients, electricity, payroll, etc. If you sell cannabis to the public, the same applies to most anything to do with the selling of your product and this helps with complying with IRS code 280E.
Staying compliant with IRS Regulations is crucial, and to do so, maintain detailed financial records.
With all accounts created, endorse a system to keep an electronic or paper copy of every receipt (not common now a days with technology, but with the Federal regulations it is highly recommended) for any purchase/expense made. Within your system, compose descriptions of the expenses when recording the expense. Maintaining this procedure not only provide a more detailed analysis of your business but will make the process of following stringent governmental regulations even easier. Staying compliant with IRS regulations is crucial and so is maintaining detailed financial records. The same data that is needed by the IRS can also be utilized by you to improve your overall profitability. With all businesses, records help the business owner to forecast and determine profitability.
One of the most important measures to consider when splitting any cost, is to understand deductible vs. non-deductible expenses/categories; document your practice for determining the split. It is crucial that you can validate to the IRS your allocations, if ever audited. Create processes and standards for allocating expenses and follow them. Keep a file that documents how you treat each expense category. Not only will this keep you compliant on your federal tax return, it will also create accounting standards to be used by all employees within your business.
280E Compliant Accounts
Because of 280E, you may find that adding/modifying accounts to be an ever changing requirement, unlike a typical business. After forming your “basic” expense accounts, review your Chart of Accounts (COA). Those accounts should be easily understood and able to go into one of two categories: Cost to Produce/Acquire your product or Cost to Sell your Product. If you are a grower, costs related to acquiring or creating your product, will likely be an allowable deduction on your federal tax return. If it is a cost related to selling your product, it will likely not be allowed as a deduction on your federal tax return, unless you are a reseller (retail or dispensary).
Following these simple rules will allow any business owner a quick glance of what deductions will be allowed on your federal return and what your (projected) taxable income will be and keep you in compliance.
At The NestEggg Group we can assist with the developing and implementation of such processes so that you can be complaint with IRS. We also can maintain your accounts so that you can have peace of mind knowing you are 100% compliant.