Reduce Your Tax Burdens, Despite Section 280E of the IRC
In 1982, Congress enacted Section 280E of the International Revenue Code stating that any businesses performing activities involving the sale of controlled substances, including cannabis, may not use deductions or credits for expenses paid during the tax year. Eventually, the federal government will likely remove cannabis from their list of controlled substances. But in the meantime, amongst the many challenges of operating in the industry, you must find creative ways to reduce your tax burdens as much as possible, despite the fact that you can’t use deductions or credits for expenses paid during the tax year. Here’s a few tips to keep in mind:
1. Hire a Good Bookkeeper
First and foremost, you will need to hire a good bookkeeper who will be able to file an accurate tax return. If you keep your accounting and financials organized, you’re able to maximize your deductions. In fact, many growers can still deduct quite a bit compared to retailers. Under Section 280E, you’re able to track many expenditures that go into your product as direct expenses – they’re considered in the cost of goods sold.
2. Understand the Laws and Plan Accordingly
The last thing you want is a huge tax bill because you weren’t aware of the laws, and most importantly, Section 280E and how it works. A good bookkeeper certainly helps as they can walk you through everything, but take some time to research and understand the laws on your own. A lot of cannabis businesses end up with a huge, unexpected tax bill because they weren’t aware of their disallowed expenses.
3. Pay Attention to Your Employees
Remember, you need to be aware of more than just each employee’s job description, you also need to keep track of the tasks they perform and how much time is spent on each task to determine the number of hours of wages that is deductible under Section 280E. Even though a budtenders wages are not deductible, the time they spend cultivating cannabis is time spent directly involved in the production – meaning it’s included in the cost of goods sold.
4. Keep Honest and Detailed Documentation
Always keep track of all of your inventory. If you fail to report your income by 20% or more, an understatement penalty may be issued. Document all of your revenue, expenses, and other information associated with each step of the process – from seeding to marketing to sales and everything in between. Keep each and every receipt that comes your way because you never know when you’ll need it.
Alvarez Technology Group is your go-to team of cannabis information technology experts. Call (831) 753-7677 to get started with us.
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