Your Cannabis Business Tax Planning Checklist

March 8, 2023

As the cannabis industry continues to grow, so does the need for proper tax planning. With constantly changing regulations and laws, it can be challenging for cannabis companies to stay up-to-date on their tax obligations. To ensure your cannabis company is maximizing their tax benefits while minimizing your liabilities, here is a comprehensive tax planning checklist you can follow.

  1. Understand the Tax Laws -The first step in tax planning is to have a basic understanding of the tax laws that apply to your business. With the still-federally illegal cannabis industry still in its early stages, the tax laws are complicated and constantly evolving. Therefore, it is important to work with a tax professional who is knowledgeable about the cannabis industry specifically and can keep you informed of any changes that may affect your tax obligations.
  2. Choose the Right Business Entity – Choosing the right business entity can have a significant impact on your tax liabilities. A Limited Liability Company (LLC) or S Corporation may be more advantageous than a C Corporation, depending on your goals and how you operate. Your experienced tax professional will guide you through these options and help you select the right entity.
  3. Keep Accurate Records – Proper recordkeeping is essential for tax planning. You must keep track of all income and expenses related to your cannabis business. This includes invoices, receipts, and bank statements. It also includes proper documentation for cash transactions more than $10,000. Accurate records can help you maximize your tax deductions, minimize your liabilities, and protect your business in the event of an audit by the IRS.
  4. Plan for 280E – Section 280E of the Internal Revenue Code prohibits cannabis companies from deducting normal business expenses from their federal income tax filings. This can result in significantly higher tax liabilities for cannabis companies. However, there are ways to minimize the impact of 280E, such as allocating expenses between different business activities and maximizing cost of goods sold (COGS) deductions.
  5. Take Advantage of Tax Deductions – While 280E creates limitations for cannabis companies when it comes to deductions, cannabis companies can take several deductions including business expenses such as rent and utilities. These deductions can vary depending on whether your cannabis business is centered around cultivation, extraction and/or retail. Operating a cannabis business is incredibly expensive, and so to leave no stone unturned, it’s beneficial to work with a tax professional who can help you identify all the tax deductions that apply to your specific cannabis business.
  6. Plan for State and Local Taxes – In addition to federal taxes, cannabis companies are also subject to state and local taxes. These will differ state by state, and even municipality by municipality. As a business owner, it’s your responsibility to understand the state and local tax laws in your area and plan accordingly.
  7. Consider Tax Credits – There are several tax credits that cannabis companies may be eligible for, such as the Research & Development Tax Credit and the Employee Retention Tax Credit. Your certified tax professional can help you identify all the tax credits that apply to your business.

By following this tax planning checklist, cannabis companies can ensure that they are staying compliant and taking advantage of all available tax deductions and credits. We can’t emphasize enough how critical it is to partner with a financial firm that is knowledgeable about the cannabis industry and can help you navigate the complex tax landscape. Our team at the CJBS Cannabis Practice is here to help.