Cannabis businesses had some big wins this year despite the environment created by the pandemic. But taxes are not getting any easier just yet. Like everything else in 2020, tax planning at the end of this year will include some challenges and unknowns. The political climate gives rise to a lot more questions than answers and sets the stage for last-minute planning alterations. Combine that with an already unfavorable tax code regarding cannabis, and taxpayers find themselves with a lot more questions than answers.
Even though some big unknowns are on the horizon, we have put together some considerations that you can still take a look at before the clock strikes twelve on December 31st.
- Roth conversions: Unfortunately, most Americans are anticipating a rise in tax rates from what the tables are currently. In a year where both your income and your tax rate may be lower than in the future, consider whether a conversion from a Traditional IRA or your 401(k) to a Roth may make sense. You will have to pay the income taxes on the conversion, but you will be spared the 10% early withdrawal penalty. Your withdrawal from the Roth later on, including from the investment earnings in your Roth, will come out tax-free, unlike Traditional IRAs and 401(k)s that are taxed at the time the funds are taken out. Additionally, Roth IRAs do not have required minimum distributions, meaning if you do not need the funds when you reach retirement age, you do not have to take them out. This can mean big savings for cannabis business owners expecting to have increasingly higher incomes in future years.
- Considerations for capital gains rates: If your income has dipped in 2020, it could be a good year to look at selling off appreciated assets. The capital gains rates vary but go down to 0% for taxpayers in the 15% income tax bracket or lower. For higher-income filers, if your adjusted gross income dipped below $400,000 this year, your capital gains rate could go from 20% to 15%, giving you some savings on recognizing those gains before 2020 is up.
- Look at available payroll tax credits: While cannabis companies were almost entirely written out of federal aid given to businesses during the pandemic, the Families First Coronavirus Response Act includes provisions that may be available to reduce employer payroll tax liability for cannabis companies through certain deferrals and credits. Absent further federal guidance to the contrary, these tax benefits should be available to cannabis businesses. However, they are not simple to employ (shocking, we know), and we recommend reviewing the credit calculations with your CPA and payroll processor to assess your eligibility. For some companies, however, this can help quickly put cashback in your pockets.
- Consider a late election entity change: Each state is specific about the type of legal entity that can be a license holder for cannabis organizations. However, even if you are in a state that requires a license to be held by a single-member LLC (i.e., an individual), you may still be able to elect to be treated as an S or a C Corporation for federal income tax purposes. With C Corp tax rates still capped at 21% for what is looking to be at least one more year, considering a late election for your tax treatment could potentially result in tax savings. This is another area we highly recommend running the numbers with a professional who can go over all the specifics with you.
Each of these strategies are suggested for consideration purposes only. Each individual taxpayer is unique in their circumstances, and not every strategy may be the best to employ for all. If you have tax planning questions or think one of these scenarios may benefit you, please reach out to our tax team to schedule a call. We recommend connecting with us before December 15th to allow any year-end decisions to be implemented.