Cannabis is an ever-changing industry, and 2020 was no exception. While we watched CBD explode and come off Federal Schedule 1, that does not mean that every cannabis business owner is now going to have an easier time when it comes to tax prep.
While hemp is no longer considered a controlled substance Federally, its close cousin marijuana remains on Schedule 1. This leaves a lot of gray area for business owners in the cannabis industry, especially when they are potentially farming and manufacturing multiple products. Marijuana remains subject to 280e regulations, which essentially prevents a business from taking operating deductions related to what is considered “trafficking of a controlled substance.” Hemp is no longer subject to the same intense limitations however, only beginning for tax years 2019 and later.
The good news for hemp industry business owners is they now have the opportunity to take advantage of a lot more deductions and credits that were not previously available to them. Hemp businesses may be able to take research and development credits, 199A deductions as well as deduct legitimate operating expenses. They will also have access to more tax planning strategies like deferred compensation plans that were difficult to implement under 280e. We strongly encourage hemp business owners to work with a cannabis expert accounting firm. A cannabis expert will still know what is best in your particular business. For instance, our cannabis clients have access to an industry-specific proprietary chart of accounts when working with us, ensuring that nothing industry-specific is missed.
Marijuana business owners more than ever require an expert to ensure that they are not overpaying in taxes or exposing themselves to unnecessary risk. Not filing accurate tax returns can expose you to penalties, interest, and other severe consequences. Businesses seeking financing or planning for future merger and acquisition transactions will be required to produce accurate tax returns and financial statements. Start preparing your business now to file taxes! You will need all your bank, credit card, and/or loan statements reconciled. Daily cash logs will need to be completed and kept as documentation. Inventory counts need to be done and documented. You will need to have documentation of what your work in process inventory is at year-end. Detailed employee timesheets should be completed, including the information of what day to day activities your employees are performing. This level of detail is necessary to maximize your tax deductions under 280e.
If you are not sure where to start, we recommend connecting with a professional as soon as possible.