Do I Really Need a Cannabis Focused CPA/CFO?
The problem is, many excellent CPAs, attorneys and consultants who don’t specialize in cannabis may unintentionally give you the wrong advice, as conventional wisdom becomes counterintuitive in the realm of § 280E. Your general practitioner attorney may end up selecting the wrong business entity for your situation and inadvertently stick your spouse with half of your cannabis tax liability. You may pay more than your fair share in taxes because your CPA doesn’t know how to properly identify and allocate your cannabis expenses under the rules for inventories. You may miss out on opportunities that a professional dedicated to cannabis accounting and finance might unearth for you. A cannabis focus and an extensive network of industry veterans to refer to can be indispensable (no pun intended).
We know you would rather concentrate your efforts on growing, producing, marketing, branding and selling the best THC/ CBD products on earth, but it is worthwhile to understand how proper accounting can keep hard earned cash in your pockets come tax time.
As it is written, § 280E means you get zero tax deductions; however, you can effectively “write off” your Cost of Goods Sold (COGS). Your capital investment in the cannabis products that you are selling cannot be taxed thanks to the good old Constitution of the United States of America, but Congress is not so merciful when it comes to allowing deductions for income tax purposes (they have the power to tax income). Think of the price that you pay for the cannabis products you resell or the price you pay to manufacture and/ or prepare your products for sale as COGS. This is nearly the entire grow or extraction operation, and at the dispensary, this is the cost of acquiring the cannabis products and may include the overhead and activities associated with storing, packaging, and making products ready for sale.
You may pay more than your fair share in taxes because your CPA doesn’t know how to properly identify and allocate your cannabis expenses…
“Trafficking” = § 280E. Trafficking is when you sell your freshly trimmed and tested flower to retailers, or when your Budtender sells the weed to your patient/ client. You cannot deduct (“deduct” is interchangeable with “tax write-off”) the salary for that Budtender when they are doing the trafficking, but you may be able to deduct a portion of the salary for the employee in the back room of your vertically aligned grow/ dispensary who is breaking down the pounds into eighths and repackaging them in those cool tuna cans with space-monkeys on them. Now think about the supervisor of both the space-monkey can man and the Budtender. Assuming this supervisor has no other duties, half of his/ her salary, benefits, etc. would be § 280E and non-deductible, and the other half could be deductible with proper cost accounting as he/she is supervising the tin can man whose duty is to make the goods ready for sale (COGS). 50%/ 50% – simple right?
Hold on a second, what if the space-can-man is paid $15 per hour and the Budtender $12? Would you be happy with 50%/ 50% allocated to § 280E/ COGS? Maybe not. You might use salary as the measure, in which case you could allocate 5/9 (calculated: $15/ ($15 + $12) of the supervisor’s salary to COGS and 4/9 (calculated: $12/ ($15 + $12) to § 280E trafficking activities. Using reasonable and consistent methodologies for allocations in accordance with the IRS’s rules gives us a bit of control over how we make allocations to COGS. You must also be able to justify the allocations with documentation, i.e., time-sheets, job descriptions, standard operating procedures, pay-stubs, etc.
Now picture the IRS Auditor doing a walk-through of your facility with you and your representative (you’ll want audit representation in the form of a CPA/ tax attorney). The Budtender and space-monkey can dude are both in jeans and a tee-shirt and are bouncing between the dispensing room and back room while doing their separate duties. This probably won’t fly. Perception is reality, and both may be trafficking in the eyes of the auditor. Now, envision a Budtender at the point-of-sale location with a lime-green golf shirt that has “Budtender” embroidered on it, and in the back-room, out of sight from patrons, a dude in a lab coat and hair net who is stuffing Wedding Cake (a potent strain of cannabis) into tuna cans. Now you have your COGS room, your COGS employee repackaging product, and your tax write-offs. That back-room employee is effectively a tax write-off when he is performing this function. The supervisor’s salary allocated to that employee also reduces your tax burden. The 25% of the rent and utilities for that 250 square feet of your 1,000 square foot dispensary (250/1000 = 25%) is also a deduction, and so on.
We are now only scratching the surface regarding the considerations that go into planning a tax strategy for your cannabusiness. It directly impacts your bottom line. In the scenario we just glossed over, your supervisor’s $90,000 salary could be a $50,000 reduction in taxable income or none at all. If you’re a C Corporation, which has a flat 21% federal tax rate in 2019, that is a $10,500 difference in federal taxes alone. Your $15 an hour lab coat guy should be a write-off too. You get the picture.
We strongly suggest hiring cannabis-focused attorneys and CPAs to handle your financial matters. If you followed along with the above scenario, you can see the value in doing so. If not, you really need help!
