The webinar will be starting soon...
Changes in Tax Law that Affect Your Cannabis Business With Derek Davis CEO & CPA at GreenGrowth CPAs
GreenGrowth CPAs About Us: 1000+ Prepared Annual Tax Returns for cannabis operators spread across all verticals: dispensary, distribution, ● cultivation, manufacturing, delivery and testing. 350+ Cannabis Business Clients ● 11+ States that our clients are spread across (CA, OR, WA, CO, MI, OH, OK, DC, HI, AZ, FL) ● 12+ Audit-related and valuation projects in 2018 ● 7 Digits in revenues in our second full business year (2018). ● Thorough and deep understanding of tax, compliance and assurance related requirements for the cannabis ● industry
Disclaimer The information contained in this webinar presentation is meant for guidance purposes only and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
Agenda Identify the changes in tax law that take effect this year ● Filing Form 1120 (C Corporations) ○ Section 199A ○ Section 280E ○ How these changes affect your cannabis business based on the ownership entity ● structure How to maximize these changes and use them to benefit your cannabis business ●
Changes in Tax Law Taking Effect This Year 1. Form 1120 and C Corporations C Corporations are required to file a 1120 Tax Return Form. The changes we will see this year that are beneficial to C Corporations is that the numbers your corporation reports will be subject to a flat, 21% tax rate, regardless of how much or how little you report.
Changes in Tax Law Taking Effect This Year 2. Section 199A Entities that are not structured as a C Corp, such as LLCs, S Corps and Partnerships have been given a similar break since shareholder or members of these business entity structures are able to deduct up to 20% on their Individual Tax Return Schedule K1 Forms based on the numbers that are reported that qualify as pass through items.
Section 199A ● Section 199A deduction is also known as the “Qualified Business Income” deduction ● Best small business tax break of the last half century ● Should be a “bigger” deal than the mortgage interest deduction for many middle-class, small business owners with established firms since it gives them the chance to save thousands annually. ● Section 199A deduction produces a bigger tax benefit than a small business pension plan such as a 401(k) plan or Simplified Employee Pension plan because the Section 199A deduction ● For very successful entrepreneurs and investors, the deduction allows a person to simply “not pay income taxes” on about the last fifth of their income. ○ Someone with $5 million of pass-through income might use the Section 199A deduction to avoid paying taxes on about the last $1 million of income. In that case, the business owner or owners save $370,000 federal income taxes. Annually.
Section 199A Section 199A also gives qualified agricultural and horticultural cooperatives as well as ● their members a deduction. That deduction could equal 20% of the business income subject to some complicated rules. Section 199A also gives a taxpayer a deduction equal to 20% of any qualified real estate ● investment trust (REIT) dividends and 20% of any qualified publicly traded partnership business income.
How To Calculate Tax Savings You calculate the tax savings a taxpayer receives by first multiplying the taxpayer’s pass- through income by 20% to get the Section 199A deduction amount, and then multiplying this deduction by the taxpayer’s marginal, or “top,” tax rate. The new tax law, for example, includes seven tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The tax savings per $10,000 of pass-thru income (so a $2,000 Section 199A deduction) varies as shown below depending on those rates.
Table 1. Tax savings From Sec 199A deduction by Marginal Rate
Calculating Tax Savings through 199A Someone who pays the 10% tax rate saves about $200 in tax for every $10,000 of pass- thru income shown on the tax return, for example. Someone who pays the 37% tax rate saves about $740 for every $10,000 of pass-thru income shown on the tax return. In short, the Section 199A deduction saves owners of pass-through entities significant tax. And under the new law, a small business owner may save as much with this tax deduction as a taxpayer might save from a generous pension contribution or from a home mortgage. Further, the more qualified business income a taxpayer earns and the higher the tax rate he or she pays, the greater the tax savings.
How to Maximize 199A Cannabis Businesses structured as LLCs, S Corps, and Partnerships can maximize their 199A filings by: 1. Putting assets into service, such as property that individual members or shareholders own, can be leased to the business 2. Maximize wages paid to employees
280E and Cannabis Businesses ● The 280E is a federal regulation that forbids deductions and tax credits for businesses involved in the illegal trafficking of drugs. Cannabis is still a Schedule 1 drug according to federal regulations. ● ● Therefore, California cannabis businesses are prevented from making normal small business deductions.
Cost of Goods Sold (COGS) Co st of Goods Sold is your Friend The Cost of Goods Sold is the direct costs associated with producing the goods you sell. Since your ● cannabis business is not treated like other legal businesses, the cost of goods sold for other types of businesses that include marketing and advertising, cannot be included in the cost of goods sold for cannabis and cannabis products. This means that anything related to marketing and advertising, like dispensary display equipment, ● marketing material, ads, and signage, cannot be claimed as a deduction like other businesses. Only parts of production, such as the salary of employees who actually harvest and cure cannabis, ● materials that go into cultivating and manufacturing the cannabis, etc. can be claimed as deductions. Things like the cost of soil, nutrients, and the cost of the components to make your product. These are ● things that you are allowed to put into cost of goods sold.
COGS and Allowable Deductions You can deduct: You cannot deduct: ● Products, packaging, and anything ● Payroll directly related to the sale of the ● Office supplies cannabis product; ● Anything not directly related to the ● The invoice price for cannabis, less cost of the product trade or other discounts ● Electric bills for designated inventory areas (electricity used in sales areas are not eligible to be deducted as COGS) ● Transportation (the cost of travel to purchase cannabis, transportation and shipping costs of the cannabis)
How To Maximize COGS 1. Be VERY specific on the job descriptions and activities of your employees Having comprehensive and detailed job descriptions for each of your employees will help to determine whether or not employees’ wages can be claimed as a deduction. Some employees’ roles that don’t involve any handling of the cannabis to create a finished product will not be deductible. On the other hand, having an in- depth look at each role could help your accountant claim some deductions for employees’ salaries you initially thought couldn’t be claimed. 2. Include the square footage of your facility and how every SF is used Some facilities, specifically dispensaries, have a harder time claiming deductions for their business because most of the business is used to sell finished products. This shouldn’t stop you from providing facility information to your accountant. You may have a small back room where you receive, repackage, store, or handle cannabis and cannabis products prior to dispensing them. If that is the case, your accountant may be able to show that you can claim a deduction for the specific room.
How To Maximize COGS 1. Keep all of your receipts Many accountants appreciate clients who take the time to put everything together to make filing taxes easier. In the case of cannabis businesses, your accountant should leave “no stone unturned.” Provide your accountant with every receipt for every expense. There may be expenses that your business can claim that you may have thought couldn’t be claimed before. 2. Know ALL of your taxes In the cannabis industry, there are three types of cannabis taxes. Cultivation tax, Excise tax, and Sales and Use tax. Depending on what type of business you have, there are different tax deadlines that need to be met for each type. Being well informed and staying on top of being compliant is half the battle when it comes to getting the most deductions for your cannabis business.
COGS Best Practices Create seperate account ledgers for COGS expenses and regular business expenses ● Set up a system of checks for verifying cash flow for each account ledger ● Practice strong inventory management and record keeping ● Set up controls to prevent fraud and theft ● Reconcile your ledger with your different account transactions daily, weekly, and monthly ● Keep a strong paper trail with receipts signed by vendors and pay slips signed by employees ●
Recommend
More recommend
