Welcome to our weekly roundup of deadlines and permit updates from around the state. If you are applying or thinking about applying for a cannabis license in Avalon, Sebastopol, Paso Robles, Santa Ana and Carson City, we have some updates for you today.
We make it our business to provide you with consistent city updates that are in the process, or have released, new cannabis license applications. Should you have questions about licensing in any of the above cities please contact California Cannabis CPAs today. The recent tax reform law passed by Congress has brought a ton of new changes – and new opportunities – for businesses looking for tax deductions this year. Read our recent updates on changes to the international income tax deduction and the corporate dividends received deduction. This week, we’re covering the Qualified Business Income (QBI) Deduction. What is the QBI? Under the new tax law passed by Congress in January, 2018, certain types of business entities are entitled to take a 20% deduction on “qualified business income” earned. These entities include:
What is qualified business income? Basically, it’s the ordinary, non-investment income your business generates. Think of it as your revenue from sales, without things like interest or dividend income or any other gains from sale of property. It also excluded earned income like salaries and guaranteed payment. Before you start celebrating what looks like a lot of free money, note that the deduction is limited to the lesser of EITHER 20% of qualified business income, or 50% of the total W-2 wages paid by the business. Here’s an example of the MAJOR impact the QBI can have on your tax return (its an over simplified version for ease of explanation):
The fine print: this limitation does not apply for taxpayers below the following threshold amounts. Likewise, this table is a bit of an oversimplification of a complicated deduction. To fully understand if your business can claim QBI, contact one of our experts.
These amounts are indexed for cost-of-living adjustments in $50 increments. How to take advantage of the QBI Deduction As previously noted, the QBI can only be claimed by certain business entities. Cannabis companies that have registered as partnerships, S corporations, or sole proprietorships may be able to take advantage of the QBI. Registering your business as one of these entities gives you a competitive tax advantage over C corporations, as well as a competitive advantage over employees. Its important to structure your business in a way that can allow maximum deductions. The QBI deduction can get complicated pretty quickly, so if you want to take advantage of this deduction on your taxes this year, get in touch with the experts at California Cannabis CPAs. Lastly, please note that the QBI deduction will not apply after 2025. Therefore, if you’re interested in taking advantage of this deduction, now is the time! It also means that you shouldn’t structure your entire business around this one deduction: if none of these business entities feel right for your particular needs, it’s not worth changing your entire business model to suit a deduction that expires in 2026. If you do decide an S Corp, sole proprietorship, or partnership is right for you, consult with our experts to make sure your company is structured appropriately to take advantage of the QBI. This week in cannabis updates: here’s what you need to know if you are applying or thinking about applying for licenses in Culver City, Cotati, Adelanto or Moreno Valley. There are also new deadlines for Thousand Oaks and Merced that you’ll want to pay attention to! Plus: what do you think about the new proposed legislation allowing marijuana use for pets?
As always, California Cannabis CPA is here to help you through the arduous (and sometimes confusing) processes of obtaining a cannabis license. Want to chat about how we can make that happen? Send us a message. We look forward to hearing from you. Nearly three months into the legalization of cannabis in California, and we’re still covering state updates to taxes related to running a cannabis business. This is a big update for dispensary owners located in Los Angeles – and impacts how you pay your city taxes. Today’s post: Los Angeles’ updates to the existing L050 Medical Marijuana business tax classification. As of January, 2018, the previous business tax classification was replaced by the following rates.
For more on cannabis taxes for retailers and cannabis cultivators, check out our blog series on cannabis taxes.
When do you need to pay these taxes? These tax payments are due on a quarterly basis starting in January 2018. To give businesses time to adjust, any activities related to the first quarter of 2018 (January, February, March) and the 2nd quarter of 2018 (April, May, June) will be both due on July 1, 2018. After that, quarters will be due after the last day of that quarter. For example the 3rd quarter of 2018 will be due October 1, 2018. In July 2019, the schedule will change to reporting on a monthly basis. How do you report these taxes? Look for tax certificates to come in the mail from the Office of Finances within 3 to 4 weeks after registering as a business. These business tax registrations certificates (BTRC’s) are for the purpose of business tax compliance, and you should not consider them as your permit to begin operating as a cannabis business. For more information about these business tax classifications please refer to the Los Angeles Municipal Code sections 21.51 and 21.52 or get in touch with the experts at California Cannabis CPA. Exciting news! If you are applying or thinking about applying for licenses in Santa Barbara county, San Luis Obispo, Seaside, Coachella or Salinas, we have some big updates for you today. In addition, California is moving one step closer to allowing additional flexibility for temporary cannabis events. Read all the details below.
We will continue to update you as the city releases more specific information. If you’d like to get a head start or have any permit/licensing questions – California Cannabis CPA is available to discuss your questions and needs.
Commercial Cannabis Permit – Amendment – Major: $2,395.65 Commercial Cannabis Permit – Amendment – Minor: $788.79 Commercial Cannabis Permit – Amendment – Administrative: $205.39 Commercial Cannabis Permit – Appeal: $513.99 Commercial Cannabis Permit – Renewal: $1,346.03 Click here for all updated Salinas cannabis permit pricing. Will there be additional temporary cannabis events? Recently, two bills were introduced that discuss the topic of cannabis at temporary events. Under the Medical Marijuana Regulation and Safety Act (MAUCRSA), cannabis special events can only take place at a county fair or district agricultural association event. Assembly Bill 2641 and Assembly Bill 2020 have been introduced and are attempting to widen those restrictions. AB 2641 would authorize the Bureau of Cannabis Control to issue temporary event licenses and would authorize a state temporary event licenses to be issued for an event. Therefore, events could be held at any venue approved by local jurisdiction. AB 2020 would provide additional flexibility and give local jurisdictions the ability to determine where and when they want to hold a cannabis special event within their borders. Oakland, California was one of the first supporters of AB 2020 as it wants to allow for cannabis at their Art and Soul Festival. Although this might prove difficult, if Oakland is allowed to add cannabis to this popular festival, it is likely other cities will follow suit. We will keep you updated on the progress of these two bills as AB 2020 is set to be read in March 2018. In the meantime, please contact California Cannabis CPA with your questions related to temporary cannabis licenses. We’re back from our coverage of Michigan’s medical cannabis licensing updates with more tax law changes that may benefit your cannabis business. As CPAs we want to help your small business understand the implications of the new 2018 tax plan and figure out how to get the most from your tax return. Today’s topic: corporate changes for international taxes. Of course, if you have specific questions, please reach out to an expert at California Cannabis CPAs.
Background on the Federal Income Tax Before giving you an update on the changes, let’s first have a quick recap of how US taxpayers have traditionally reported their income tax. Current law mandates the US taxpayer report their worldwide income and offers a foreign tax credit for any taxes paid overseas. For example, if you went on a trip to Europe for three months and worked during that time, you will be taxed on that income by the US government. You may also have paid taxes on that income to the country in which you worked, in which case you would receive a credit from the US compensating you for that amount. Historically, this rule has been applied to corporations as well. Foreign income earned by a foreign corporation that is owned by a US citizen was not subject to US taxes, unless the income was distributed in the form of a dividend. Changes to the International Income Tax The new law deploys a “territorial” income tax system. Under this system, companies are only taxed on their US earnings, meaning that any foreign income can be excluded from your income report. Why? The goal of the new law is to encourage companies to bring their profits back to the US. The new provisions incentivize the repatriation of foreign income to the US with tax-free status. Cash repatriated back to the US will be untaxed when the transfer takes place, however no foreign tax credit is allowed for taxes paid overseas. Essentially, this is both a carrot and stick approach to bringing your profits stateside. If you bring your cash back to the US economy, you’re rewarded with tax-free status. If you don’t, the US will no longer be reimbursing international taxes. International Income Tax: The Details As with any tax law, the new bill includes many provisions to ensure that corporations do not have excess untaxed returns on earnings from low tax jurisdictions:
It’s also important to note that C-Corporations will get a 100% dividends-received deduction on the repatriation of foreign income in the future where the US Corporation owns 100% of the foreign company. What does this mean for your cannabis business? If you’re just starting to form a business and considering what business structure is right for your cannabis business, a C Corporation may look more appealing. In addition to being able to take advantage of the DRD, a C Corporation has many benefits if you’re looking to eventually expand internationally. And international expansion might be the next big move for cannabis companies: the California is in good company with 20 other countries that have legalized cannabis to some degree. Besides commonly known places like The Netherlands, Uruguay, Peru, and Jamaica all have cannabis legalization rules in the books. Likewise, Germany, Spain, Portugal and the Czech Republic are all weed-friendly communities well on their way to full legalization. If you’re looking to diversify your customer base, consider expanding outside of US borders. Curious what other deductions the new tax law holds? Talk to one of our experts or sign up for our email newsletter for new updates each week. Over the past few months, the state of Michigan has been rolling out some of the most comprehensive state licensing requirements for cannabis companies. Though cannabis isn’t fully legalized in Michigan, the stringent policies the state has enacted on medical licensees suggest the state is on the way to full legalization.
Michigan is ranked second in the country for states with medical cannabis programs, and beginning December 2017, a new regulatory framework was enacted to create a licensing framework for the growing number of medical marijuana businesses. LARA is Michigan’s Department of Licensing and Regulatory Affairs, the group in charge of issuing licenses (much like the CDTFA in California). LARA is in charge of reviewing applications, issuing licenses, and providing oversight to groups with active licenses. Cannabis Licenses in Michigan At this time, there are five different types of medical cannabis licenses a business can obtain in Michigan:
What are the application requirements? Michigan has one of the most involved application processes yet. Of course, the application requirements will vary based on what class license or type of license you’re seeking: Class A licenses are less involved than Class C licenses, for example. However, Michigan officials warn that the application process is going to be very intrusive. Capital Requirements Michigan will likely ask applicants to meet a capital requirement, that is, to show they have adequate financial resources to cover their expenses. According to one news source, “applicants must show that at least 25% of the assets used to meet these capital requirements are liquid and can be easily converted into cash.” LARA will likely ask for an accountant attestation (and this is where things may feel intrusive). The attestation verifies your financial history, almost like an audit. An accountant will look at your financial records and ask questions concerning:
Then, an accountant can provide a letter of attestation proving you are able to sustain a medical cannabis business if permitted. Annual License Fee The next requirement, after the capital requirement, is that businesses must pay an annual license fee to the state to be allowed to operate. Though the fee will be determined by the number of license applicants, experts estimate this fee could range from $10,000 - $57,000. Some municipalities may also include their own administrative fees. Additional Requirements As of December 2017, the licensing process was mapped out into two phases: pre-qualification and full license qualification. Pre-qualification will involve a criminal background check and $6,000 licensing fee. If you make it to the next phase, full license qualification, LARA experts will verify your business location, local government approval, and more. In brief: Michigan’s licensing process for medical cannabis companies is involved. But, we believe in the long run, it’s worthwhile to start the application process sooner, rather than later. Your business will be ahead of the game should full-legalization happen in the coming months (or year). For more questions on Michigan’s application process, check out LARA’s FAQs or contact one of our experts! Santa Barbara, Merced, Thousand Oaks, Benicia and the California State Licensing Board Weekly Update2/15/2018
With 2018 comes an abundance of opportunity as new cities and counties are allowing for additional cannabis licenses. Acting in a swift, vigilant but detailed manner is essential to securing your desired cannabis license. Here are several cities with pending and quickly approaching application deadlines.
We will continue to update you on various city and county license application openings on a weekly basis. We’ve guided many of our clients through the arduous paperwork and licensing process, and we are happy to do the same for you. Contact California Cannabis CPA today to ask how we can help your business. Tax season is well underway: are you ready? We’re starting a series to help cannabis companies understand how the recent tax reforms passed by Congress will impact your tax obligations. Like many small businesses, the intricacies of the new tax plan have big implications for California cannabis companies. From what you can deduct on your tax return to what you need to be responsible for moving forward, we’re here to help you catch up. If you have specific questions, please reach out to an expert at California Cannabis CPAs. What is a DRD? DRD stands for Dividends Received Deduction. This is a federal tax deduction that certain corporations – ones that receive dividends – can take. The goal of the DRD is to prevent the same income from being taxed three times. The DRD makes it so that if Company A receives a dividend payout from Company B, Company A can claim that dividend as income and accordingly receive an income tax reduction. How much can you claim on your DRD? DRD is a little more complex than it may seem at first glance. The deduction amount that a company may claim depends on its percentage of ownership in the company paying the dividend. For example, if Company A owns a 20% stake in Company B, and Company C owns a 60% stake in Company B, Companies A and C will be able to claim different amounts of DRD. The amounts are based on their ownership stake. As of 2018 and the changes in the tax law, the percentage DRD a company can claim changed: Current DRD
Effective for years beginning after 12/31/17, the 70% DRD will be reduced to 50% and the 80% DRD will change to 65%.
The Fine Print There are a few key limitations to know, including the taxable income limitation and the timeline for owning shares limitation.
What this means for Cannabis Companies It’s not uncommon for our experts to see a cannabis holding company (the company which a main investor will agree to fund) operate with a subsidiary (e.g., a real estate company, operating company, or management company). Creating a structure that allows you to maximize your DRD will decrease your overall effective tax rate and increase your cash flows to re-invest in your companies. Be aware of the latest changes in the tax code if you want your company to survive in the new highly taxed marketplace. Specific questions? Get in touch with our experts today to make sure you’re claiming your full deductions on this year’s tax return and mitigate the possibility of overpaying your taxes. Last week, we covered how to find an investor for your cannabis business. It can be hard to find a cash infusion in this industry – many banks won’t issue loans due to federal regulations against the legal sale of cannabis. Instead, look for private equity firms, crowdfunding, or non-specific business or personal loans you can use to get your business off to a running start.
Hopefully, this will lead many cannabis companies to connect with angel investors, private equity firms, or venture capitalists. If you fall into that category, how can you be prepared for the future influx of opportunities from cannabis companies? There are a few things to seek when evaluating cannabis companies from an investor standpoint. Cannabis companies come with a lot of inherent risk: the industry is new, regulations are still evolving, and there is a lot of cash involved. Bad record-keeping, poor cash control, and outright fraud are just a few of the things many investors worry about. Ask these questions to determine if a cannabis enterprise is worthy of investment. Does the company use a cloud-based accounting system? What’s wrong with a traditional accounting system, like keeping track of your sales and purchases in an Excel spreadsheet? A few things:
Cloud-based systems are more secure, mobile-friendly, and easily auditable. Keep tabs on your investment with a cloud tool that lets you quickly review invoices and receipts. Cloud software is more secure: if a laptop is stolen, the data stays safe. A cannabis business can limit the actions an employee can take by deploying different user roles, and make sure that only certain people can enter cash flow transactions. Ask for transparency from a cannabis business to ensure that your money is being used as it should be. Does the producer or extractor use a robust system of measurements? Cannabis producers or extractors work with lots of raw material. The end product is like liquid gold: so throughout the process, it’s important to have controls in place to minimize waste. Ask to see evidence that the ratio of final product to raw material makes sense. Can the cannabis extractor/producer demonstrate tight production controls? Can they show the use of standardized measurements at multiple points throughout the process? Can they show that they have taken steps to safeguard against fraud? These are all things you can look for when at an onsite visit to a cannabis operation. Have they done their due diligence on third-party vendors? Make sure anyone you’re entering into a partnership with has cleared their third-party vendors. Cannabis businesses have lots of secondary partners – from suppliers to distributors, it’s important to make sure these vendors are fully licensed and aboveboard. Ask a cannabis company for copies of their partners’ California cannabis permits, records of vendors’ physical addresses, contact names and numbers, and any mutual business references that can be checked. See that the cannabis company keeps vendor agreements with every partner on file. Does the canna-business use a system of checks and balances? Checks and balances can be as simple as separating staff roles for different accounting functions. Fraud is easy when one person handles all the bookkeeping functions: things such as processing customer payments, managing petty cash, keeping accounting records, or paying invoices. The cannabis business should have at least two people to manage these functions, and keep their accounting and cash handling separated. It’s also recommended that they also keep separate systems for inventory and manufacturing accounting. Some companies might find it helpful to use a tool like Clover or Xero to keep an eye on their employees. Tools like Clover Payments Plus can give you as the investor better insight into things like cash in and cash out, sales, employee management and scheduling, and inventory tracking, and more. Do they have up-to-date records? Keeping up-to-date records show that that the cannabis business is the real deal. Here are just a few things to ask for:
Depending on the unique cannabis operation, get specific on what other permits, records, and local licenses you need to see. Do they have municipal permits? Do they use a system of dual signatures to control cash flow? Does the cannabis company have the right insurance? If you have any questions, we’re here to help. Don’t hesitate to reach out to California Cannabis CPAs! 2018 and the new tax code presents itself with a myriad of changes on both an individual and corporate level. One of the biggest changes, from a corporate level, was the elimination of the AMT (Alternative Minimum Tax). Today, we will talk about the definition of AMT, why it started and how it will impact the cannabis industry.
What is AMT? The corporate Alternative Minimum Tax (AMT) is a separate and distinct method of taxation that runs parallel to the “regular” corporate income tax. Prior to 2018, every corporation had to calculate its tax burden under both the regular corporate income tax and the AMT, paying the higher of the two. It’s important to note, today we will strictly be talking about AMT as it relates to corporations, not individuals (the AMT was not eliminated for individuals). The Alternative Minimum Tax began in 1969. The start of AMT can be traced to then Secretary of Treasury Joseph W. Barr. He testified before Congress that 155 individual taxpayers, with incomes exceeding $200,000, had paid no federal income tax in 1966. Adjusted for inflation, those numbers would translate to $1.5 million dollars today. The idea that the wealthiest citizens could pay zero income tax did not sit well with the government. Therefore, the AMT was created. This ensured that even those with higher incomes would pay a minimum amount of tax. Otherwise, through tax deductions and credits, citizens could essentially pay zero taxes. With so many deductions available, lawmakers wanted to ensure everyone paid at least some base minimum of tax regardless of how many tax breaks they could use to their advantage. Changes For 2018 Prior to the changes of 2018, the United States had one of the highest corporate tax rates in the world at 35%. The new 2018 regulations establish a flat 21% corporate rate for businesses and personal service corporations (PSCs). The corporate tax rate average for the developed world is 22%. Theoretically, the reduction of the corporate tax rate by 14% should create a nice boom for U.S. based companies, allowing them to keep their operations and profits here in the U.S. Prior to the changes for 2018, the corporate AMT tax rate was 20 percent. Additionally, C corporations with average gross receipts less than $7.5 million over the preceding three tax years were not subject to AMT. As of January 1, 2018 – the corporate AMT was completely eliminated. Individual AMT still applies, although a few things have changed. Please consult California Cannabis CPA if you’d like some guidance on individual AMT regulations. How Do These Changes Affect The Cannabis Industry? If your cannabis business is a corporation, you may benefit from the elimination of the AMT. If you are still researching how to set up your business, read our 10 steps to start a cannabis business. California Cannabis CPA is happy to walk you through the process. Theoretically, the removal of AMT should be a benefit. The AMT was a completely separate tax code that created a lot of additional record keeping. The elimination simplifies dozens of other tax code sections that were related to the corporate AMT. And unlike before, if your business made over a certain amount of money, you had to pay the higher of the two taxes. Not the case anymore. Second, functioning businesses are able to write off (or deduct) certain business expenses from their overall income. Normally, these include expenses such as operating costs, employee expenses and equipment. However, the cannabis business has certain limitations due to tax code 280E. On the federal level, cannabis is still considered a Schedule 1 drug. Therefore, licensed marijuana businesses have to file federal taxes under tax code 280E because of the Controlled Substances Act. The downside to filing under 280E is that licensed cannabis businesses pay more in federal taxes than other businesses do. 280E bans any tax deductions besides the cost of goods sold. If you try to deduct other expenses (similar to how other businesses operate) you will likely face an audit. However, there are situations where additional write-offs may be allowed. This is usually the case if your business participates in marijuana for medicinal purposes. 280E is a very complicated tax code, so we recommend consulting with California Cannabis CPA to ensure every detail is covered. In conclusion, it looks like the removal of the AMT will be beneficial, but cannabis companies will still run into challenges with the amount of expenses they are able to deduct. California Cannabis CPA is happy to speak with you to discuss your individual circumstance, ensuring you remain compliant with the new tax codes. There is a lot to think about when becoming a new business owner. But making sure your business is properly insured is one of the most important. You already went through the work to set up your cannabis business, obtained the proper licenses or perhaps secured an investor - now it is time to protect it. Today, we will discuss the several types of insurance you need to cover yourself and your business. General Liability Insurance A customer can sue your company for negligence from third-party damages, whether they are injured on the premises or injured by your property. General liability insurance protects your business against these types of lawsuits. Many small businesses buy General Liability Insurance packaged with Property Insurance through a bundled policy called a Business Owner's Policy. Commercial Property Insurance Commercial property insurance covers your building or contents if your business is damaged. It will also cover any theft that occurs and replace your business products in the event of a loss. In addition, any lost income that has occurred due to these events, or your business being closed, will be covered. Workers’ Compensation Insurance If you have any employees, California requires you to have workers’ compensation insurance. This will cover your employees if they get injured on the job. Most states require this form of insurance. Professional Liability Insurance Professional Liability Insurance covers your business should a negligence claim be made against you. This can also include mistakes, oversights or errors that are made by accident. This type of insurance is also called Malpractice or E&O (errors and omissions) insurance. If your mistakes cause a financial loss for your client, they may try to recoup court costs, legal defense fees or judgments. Cyber Liability Insurance Doing business today is drastically different than 10 years ago. With major companies recently in the headlines for having their personal client information hacked, you want to be sure your business is protected should that happen to you. Cyber liability insurance is especially important if your website collects personal information or you sell items online. Employment Practices Liability Insurance (EPLI) If your employees interact with the general public as part of your operations, it is smart to get EPLI Insurance. EPLI insurance covers claims against your company for sexual harassment, wrongful termination and discrimination. These allegations can come from the employees or the general public. This insurance would cover your legal costs and any potential payouts you may be responsible for. Beyond insurance, California’s minimum wage also increased in 2018.
California Cannabis CPAs wants to make sure your business is protected. We are here to walk you through each type of insurance, to help you make sense of it all. Each individual county within California may also have its own requirements, so please review accordingly. Ask us how we can help today. Cannabis may be legal in California, but for many entrepreneurs, this industry still carries a stigma that can be hard to overcome when seeking funding. Investors may be intrigued, but the newness of California’s regulations paired with the unknown of funding a new business may create a level of risk that turns away funders. Plus, banks are reluctant to give new cannabis entrepreneurs a loan. Because cannabis is still considered a Schedule I drug by the DEA, banks that provide loans to California cannabis businesses could be subject to prosecution.
For a canna-business, this presents a unique problem. Starting any business requires some amount of cash: according to Census data, more than 40% of all small businesses started up for under $5,000. Cannabis businesses are typically a bit more capital-intensive. For example, by some estimates, opening a cannabis dispensary can run you approximately $50,000-$65,000 in start-up expenses. Yikes. Even if your business is projected to be less capital intensive than a dispensary, the more cash you have at the beginning, the greater your chances of success. Finding a funder is extremely helpful in launching your venture. So, how can you show your cannabis business is worthy of their consideration? Decide whether you’re willing to do debt or equity. Broadly speaking, there are two ways to get capital for a new business: debt and equity. When you select deby, you take out a loan that you have to repay over time (usually with some interest). When you select equity, you’re selling a piece of the company – essentially, trading a degree of ownership for cash. Both debt and equity options exist for cannabis businesses. What are the expectations for each? Debt-based lenders have a fairly straightforward application process. They focus on tangible, straightforward numbers in determining your lending ability: credit score, character, capacity to repay, cash flow and collateral. For cannabis businesses, because there are so few traditional lending sources available, a loan might look a little different. More on that later on. Equity investors ask for a formal pitch. As a potential business partner, they will want to know details such as your leadership team, product or service details, market size, competition and more. For cannabis companies, showing you’ve gone through the proper California licensing and permit procedures and have immaculate records are going to be mission critical to working with an equity investor. Consider crowdfunding. Though there aren’t many traditional funding sources open to a cannabis business, crowdfunding is still an option. The SEC allows anyone to invest $2,000 in small businesses in exchange for a stake in that business. Companies can raise up to $1 million through crowdfunding sources. Check out Fundanna, an equity crowdfunding platform for cannabis businesses. Other options include CannaFundr and 420fundme. What’s the difference between equity crowdfunding like Fundanna and regular crowdfunding (like Kickstarter)? On Kickstarter, backers get a reward or prize for backing your business. Equity crowdfunding, as you may have guessed, gives backers a piece of the company. Your backers essentially become investors. If you’re not sure which option is right for you, feel free to reach out to the experts at California Cannabis CPA. We can help answer all your questions and make sure you’re adhering to the site rules and policies. Seek a loan from an angel investor, private equity firm, or venture capitalist. Though a traditional bank can’t offer your cannabis business a loan, there are other investors who will invest if you can give them a good chance of getting a return on their money. These types of funders will look for some key metrics before investing in your cannabis business. Generally, you must:
*Banks won’t offer business checking accounts to cannabis businesses, so be prepared to show your cash flow management system or show that you personally have a bank account. Look for venture capital funds that are familiar with the industry. Research Privateer Holdings, which has raised more than $100M to fund legal marijuana businesses. Others include Tuatara Capital, MedMen Capital, and Snoop Dogg’s Casa Verde – all large players in the cannabis industry. Try an online business loan There are still some online business loan options for cannabis businesses. Many online loan companies have an easier time lending than traditional banks. Do some research to see if an online loan company can legally extend a loan to a cannabis company (as regulations will vary by state). The benefits of having a business loan includes a streamlined application process, low interest rates, and high approval rates. The downside? Some lenders do charge high interest rates, and companies may not be allowed to offer loans to your cannabis company. Take out a personal loan Many entrepreneurs take out a personal or business loan from another company to finance their startup businesses. When a cannabis company can't get funding, some entrepreneurs take out loans through a different, non-cannabis business and then use those funds in a sub-loan to their cannabis business. Depending on the loan lender, many companies don’t have any restrictions on what you use the money for. Check with your local lenders to be sure there are no regulations around using their loans for your cannabis business. To get a good personal loan, you’ll need a good credit score (700+). When you go for a personal loan, make sure to ask about their interest rates! Don’t get caught off guard should your business fail: this type of loan can have big repercussions on your personal life. Questions? Get in touch, we’re happy to help! If starting a business is hard, starting a cannabis business in the state of California can be even more daunting. With new regulations, a plethora of license and permit requirements, and a brand new set of tax guidelines to adhere to, establishing a cannabis business is no easy feat. We’re here to help make that process a little clearer for any entrepreneurs hoping to make their mark on the California cannabis industry. Here are ten steps to take to get started right away. Step 1: Select your entity type and business name This might be the most important first step for getting your business off the ground and ensuring its long-term success. The business structure and entity type you choose – whether a nonprofit, for-profit, collective, or something else – has repercussions on how you are taxed, your ability to transfer assets and ownership interests, how you will manage and run the business, as well as your persona liability. Read about some of the different business structures in our guide for understanding nonprofit and for-profit cannabusinesses. Step 2: Register with the California Secretary of State Depending on your business entity, your next step will be to register with the California Secretary of State. Find the correct forms with instructions and according fee information at bizfile.sos.ca.gov. Here’s a quick snapshot of which entities are required to register:
Step 3: Register a Fictitious Business Name (If Necessary) Your business may choose to operate under a name other than it’s legal name that you’ve registered with the California Secretary of State. If that’s the case, you should file with the county clerk/recorder where the business is located. Check the county’s website for information on requirements, forms and fees, or reach out to our experts if you have additional questions. Step 4: Get Your Local Permits and Licenses It’s not sufficient to file documents with the California Secretary of State before operating as a canna-business.California has a dual licensing system, meaning you are responsible for also obtaining a city, county, or city and county license, permit, or other authorization. Check with the municipality and county where you will be operating as a cannabis business to determine what the process is for obtaining the proper authorizations. Our local experts can also assist in this process. Step 5: Get a Seller’s Permit and Cannabis Tax Permit from the CDTFA (If Necessary) Do you sell cannabis or cannabis products? Then you need to register with the California Department of Tax and Fee Administration (CDTFA) for a seller’s permit. If you are a cannabis cultivator, processor, manufacturer, retailer, microbusiness, or distributor making sales, then you have to get a seller’s permit prior to applying for a license from the California Department of Food and Agriculture, the California Department of Consumer Affairs, or the California Department of Public Health. Note that if you are a distributor, you will need to register with the CDTFA for a cannabis tax permit to report and pay cannabis taxes to the CDTFA. Check our guides for cultivators and manufacturers, distributors, and retailers for more details. Step 6: Obtain Required State License(s) Depending on your role in the cannabis industry (retailer, manufacturer, distributor, etc.), you must apply for a specific license before engaging in cannabis-related activities. Specific information for cultivators and manufacturers, distributors, and retailers can be found in our guides. Step 7: Understand your Employer Responsibilities Like any business, if you plan to hire some staff, you need to register as an employer and obtain a federal Employer Identification Number. Now is also the time to start considering your business’s payroll taxes, wage withholding requirements, matching employer withholding requirements and employee employment eligibility requirements, along with requirements for State Disability (workers’ compensation) Insurance, Unemployment Insurance, and equal employment opportunity. Step 8: Determine your Tax Obligations There’s nothing quite as jarring as being surprised by a big bill come tax time. While you set up your business, take a moment to do a little research on what your upcoming tax responsibilities will be. Try these resources, and if you have any questions, reach out to our experts.
Step 9: Anticipate Ongoing Business Registration Requirements This seems like a lot of licensing, registration, and compliance, but even after you get started, there is still more to come. Every corporation and LLC is required to file a Statement of Information with the CA Secretary of State within the first 90 days of registering and then again annually or biannually, depending on your entity type. Step 10: Register your Trademarks Last but not least, make sure to register your trademark or service mark. You may start this process after your cannabis service or product is lawfully in use, that is, your licenses have been approved and you’ve started operations within California. Visit the California Secretary of State’s Trademark and Service Mark page to learn more about this process. Whether you’re a cultivator, manufacturer, retailer or distributor, it’s important to become familiar with California’s Cannabis Track-and-Trace system. Through a platform called Metrc, California state officials can regulate and supervise the cannabis industry. Here are some of the basic things you need to know about this system.
What is the Cannabis Track-and-Trace System? The California Cannabis Track-and-Trace system tracks all commercial cannabis and cannabis products—from cultivation to sale. CCTT is run by the the CalCannabis Cultivation Licensing division of the California Department of Food and Agriculture, which covers tracing cannabis in three different branches: Licensing, Compliance and Enforcement, and Administration. Do I need to know about CCTT? Yes. If you are a licensed cannabis business, you are required to use the CCTT system to record, track and maintain information about your cannabis and cannabis product inventories. CCTT is hosted on a system called Metrc, which is a cloud hosted online reporting tool you can use to maintain information about your cannabis products as they make their way from seed to sale. Why does CCTT exist? Cannabis Track-and-Trace is important for a few reasons:
Basically, Metrc allows the state government to have oversight into the cannabis inventories, maintain quality control, make sure all taxes are being paid correctly, and regulate the transfer of cannabis supplies from cultivator to customer. How do Metrc and CCTT work? Metrc uses two types of tags to keep tabs on cannabis and cannabis products. The two tag categories are Plants and Packages. Plants are are further categorized as either immature or flowering. Immature plants are cannabis plants that are not flowering. Flowering plants are those that have formed a mass of pistils measuring greater than one half inch wide at its widest point. All plants must enter the system through immature plant lots (up to 100 plants/lot). With these lots, up to 100 plants are assigned a Unique Identifier Plant tag. Each immature plant gets a label with the lot UID, while individual flowering plants get a Plant tag. Meanwhile, Packages are created from immature plants, harvest batches, testing lab samples, production batches, and other packages. Any amount of cannabis or cannabis product that may be sold, manufactured or transferred must be placed into one or more packages. Then, each package receives an UID package tag created in Metrc. Make sure that any product that you intend to transfer from one licensee to another has an UID physically attached to the package. What is a unique identifier (UID)? The UID is a unique alphanumeric code or designation used to uniquely identify cannabis and cannabis products on a licensed premises. As an annual licensee, you will be responsible for assigning a CCTT-Metrc nonrepeating UID to each immature lot, flowering plant, and distinct cannabis product. Each UID then keeps track of the cannabis products as they make their way through the supply chain. How will I get my UIDs? And do I have to pay for them? When you’re set up in the Metrc system (more on that in a minute), you’ll be able to order your UIDs through the system. The cost of UIDs is factored into the fee for your state’s cannabis license. How do I use my UIDs? Let’s divide this up once more into UIDs for Plants versus Packages.
What do you need to do now? To get started using Metrc, follow these steps:
For more on how to get started using Metrc, follow the instructions listed in the primer released by the CDFA. If you get stuck or have any questions along the way, reach out to the experts at California Cannabis CPA to get advice.
We’ve offered guides for cannabis retailers and cannabis distributors, and here we cover tax responsibilities for cannabis cultivators and manufacturers. If you’ve been following our guides, many of these responsibilities will be familiar. Cannabis cultivators are anyone who grow, harvest, plant, dry, cure, grade, or trim the cannabis plant. If you are a nursery or cannabis plant processor, you are considered a cultivator. If you are someone who produces or prepares cannabis products, labels or re-labels cannabis containers, or who packages/repackages cannabis products, you are a manufacturer. Cultivators have to register for a seller’s permit with the CDTFA online at cdtfa.ca.gov. As a cultivator, when you make sales to other cannabis businesses, you will be required to get resale certificates, file sales and use tax returns, and report and pay use tax on taxable items purchased without tax and used by the cultivator. In addition, cannabis cultivators pay the cultivation tax to the distributor or manufacturer. In cases where unprocessed cannabis is first sold or transferred to a manufacturer, the manufacturer must collect the cultivation tax from the cultivator and pass it to the distributor for collection by the CDFTA. As a manufacturer, your responsibilities are similar to cultivators. You must also register for a seller’s permit, obtain resale certificates, file sales and use tax returns, and report and pay use tax on taxable items on taxable items purchased without tax and used by the manufacturer. Likewise, you are responsible for collecting cultivation tax from the cultivators and supplying a receipt if the unprocessed cannabis is transferred or sold to you first. Then, you will pay the cultivation tax to the distributor, who transfers the payment to the CDTFA. Be sure you keep proper records and have the right permits and licenses – in addition to a seller’s permit, both cultivators and manufacturers may need local or municipal-level licenses. We can help you sort out your licensing needs. Cultivation Tax This tax applies to all harvested cannabis that has entered the commercial market: that is, cannabis that has completed testing and complies with the quality assurance review as required by law. How much is cultivation tax? It depends on the type of cannabis products being sold.
*Fresh cannabis plant fee only applies when the cannabis plant is weighed in an unprocessed state within 2 hours of harvesting. If you have immediate questions, please get in touch with our experts. Once again, distributors collect the cultivation tax from cultivators and manufacturers. Tax is due when the cannabis enters the commercial market. The distributor will provide an invoice or receipt when they collect the cultivation tax, and you should keep this for your records. Sales and Use Tax File your sales and use tax returns separate from your cannabis and income tax returns. Sales and use tax returns should be filed on the CDTFA website based on the due dates, which may vary. There are also some prepayments you will be asked to make which can be found on the same site. Keep copies of your returns in case there’s ever a question on your record-keeping. Sales tax applies to the retail sales of tangible personal property, including some labor or service costs if they are related to the sale of tangible property. Sales tax does not apply to valid sales for resale, though, so as a cultivator or manufacturer, virtually all your sales should be for resale (meaning your sales tax responsibilities are negligible). When you make a resale, use Form CDTFA-230 as your resale certificate. Don’t use a resale certificate for any personal property – you may be penalized! Use tax is a tax on all items that you use and consume and purchased without paying tax. In the real world, this might include getting a massage – it was a service you used that likely didn’t include tax when you originally paid the masseuse. Use tax is the same rate as sales tax and will generally apply to purchased from outside California that you didn’t pay state tax on at the time of purchase. These tax responsibilities can seem overwhelming, but that’s where our experts come in to help. If you have any questions pertaining to cultivation, sales, or use tax, please don’t hesitate to get in touch. We’re here to help you stay compliant! Leading up to 2018, the CDTFA passed two key regulations clarifying their requirements for correctly paying your cannabis cultivation and excise taxes. Regulations 3700 and 3701 pertain to collecting tax on inventory you’ve had in stock before the full legalization of cannabis in California, and are important to understand before filing your first-quarter report on April 30, 2018.
Cannabis Tax Regulation 3700: Cannabis Excise and Cultivation Taxes Passed in December, 2017, this regulation clarified the existing excise and cultivation tax policy everyone must follow starting January 1, 2018. Specifically, this regulation clearly defines terms such as “fresh cannabis plant,” “distributor,” “cultivator,” and cannabis leaves and flowers. It also lays out the cultivation tax rates, which we’ve covered in previous articles. Perhaps most importantly, Regulation 3700 also lays out the process for collecting the cannabis excise tax. Distributors are responsible for collecting, reporting and remitting cannabis excise tax from the cultivators and retailers each quarter. Late payments incur the following penalties:
However, if the CDTFA finds that a failure to make a timely payment is due to reasonable cause, you may be relieved of penalty. To be relieved, you must prove that payment was late due to circumstances beyond the person’s control, and occurred in absence of willful neglect. If you find yourself in this situation, it’s best to consult with a tax or law expert to file a statement explaining the facts pertaining to your claim. Cannabis Tax Regulation 3701: Collection and Remittance of the Cannabis Excise Tax After passing Regulation 3700, California officials discovered a loophole to the cannabis excise tax– which regulation 3701 aims to close. Prior to the full legalization of cannabis in California, no person was required to obtain a distributor license until January 1, 2018. However, there were certainly individuals and companies operating as distributors before January 1 – distributors in the medical cannabis industry, for example. These companies would have existing cannabis inventory – so should this inventory be subject to the new cannabis excise tax? Regulation 3701 says that if a retailer possesses or controls cannabis or a cannabis product at 12:01 a.m. on January 1, 2018, and makes a retail sale of that cannabis or cannabis product on or after January 1, 2018, then that retailer must charge a cannabis excise tax based on the average market price. This excise tax is due to the distributor by the fifteenth day of the calendar month following the close of the calendar month in which the tax was collected. Here’s how this works in practice. A retailer purchases cannabis in 2017, and on January 3, 2018, purchases cannabis from a distributor for $100/oz. The wholesale cost is $100/oz. Therefore, the average market prices of an ounce is $160.00 ($100 x 1.6). The cannabis excise tax due on the sale of the cannabis purchased in 2017 is $24.00 ($160 x 15%) and the retailer must collect this excise tax from its customer. Lastly, distributors need to know how to report the pre-2018 excise tax. When remitting the excise tax to the CDTFA, distributors should include the following information:
Include this information on your first quarter tax return, due April 30, 2018. Questions? Get in touch, we’re happy to help. Continuing our series from last week, today we’re covering the key tax policy that cannabis distributors in California are responsible for now that proposition 64 has been approved. If you’re a retailer looking for detailed tax information, check out this for California cannabis retailers.
Distributors are also responsible for collecting and submitting a variety of taxes, including cannabis cultivation, sales, excise, and use taxes. Distributors are also responsible for filing the cannabis taxes after collecting cultivation and excise tax from the retailers and cultivators, and for keeping resale certificates on file from retailers. Here’s how to file your taxes, how much to collect from your cannabis partners, and how to handle sales tax. Please consider that we are not a law firm, and this advice should not substitute any proper legal advice. Are you a cannabis distributor? You are cannabis distributor if you procure, sell and/or transport cannabis between licensed cannabis businesses such as cultivators, manufacturers or retailers. Distributors must meet also meet the following requirements:
If you are also making sales, and not just transporting product, you are responsible for registering with the CDTFA to get a separate seller’s permit. This will also require filing Sales and Use Tax Returns. Are you a microbusiness? This complicates things a little. Microbusinesses may operate as a distributor, but in that case they are only required to hold one license that authorizes the microbusiness as a distributor. A microbusiness may operate as a cultivator, distributor, manufacturer and/or retailer. Microbusinesses are responsible for all of the same requirements as distributor requirements listed above. Distributor Cannabis Tax Requirements CULTIVATION TAX As a refresher, The cultivation tax is imposed imposed on all of the harvested cannabis that enters the commercial market. Cultivators are responsible for paying the cultivation tax to the distributor. In some cases, the cultivator is responsible for paying the tax to the manufacturer if the cannabis is transferred or sold to a manufacturer first. Either way, as a distributor, you are responsible for remitting the cultivation tax to the CDTFA. Cultivation tax rates are:
To qualify for the third point, the cannabis plant must be weighed in an unprocessed state within 2 hours of harvesting. If you have immediate questions, please get in touch with our experts. When you collect the cultivation tax, you will need to provide a receipt to the cultivators and manufacturers that lists the amount of the tax collected and relieves your cannabis partners from liability. CANNABIS EXCISE TAX Excise tax is a bit complicated: put most simply, excise tax is an added 15% of the average market price to the listed retail price of the cannabis product. It’s also contingent on the type of transaction between the customer and retailer. Read more about the cannabis excise tax under our post for retailers. FILING YOUR CANNABIS TAX RETURN The process for filing your cannabis tax return is slightly different from filing your income tax return and sales and use tax return. File your return on the CDTFA.gov site according to the quarterly schedule (so, your first return is due April 30). On this return, you are responsible for reporting the both the excise and cultivation taxes due for any cannabis and cannabis products that entered the commercial market during the reporting period. For example, on your April 30 return, you will report excise and cultivation taxes for January 1 – March 30, 2018. When reporting the excise tax, you must include reports for any product that has been transferred to a retailer (whether or not the product has already been sold). Keep copies of your returns for future reference, and speak to one of our experts if you have any help. Distributor Excise Tax Requirements CANNABIS EXCISE TAX As a distributor, you are responsible for paying the cannabis excise tax to the CDTFA and collecting it from your retailers you supply. Sales tax does not apply to valid sales for resale. Unless you’re operating as a cannabis microbusiness, your sales as a cannabis distributor are likely to be all resale – meaning you won’t be responsible for paying sales tax. Enter: resale certificates. Resale certificates allow you to buy resale inventory without paying sales tax reimbursement to the seller. You must provide a timely resale certificate to your supplier, with your seller’s permit information at the time you are making your purchases. Use Form CDTFA-230 as your resale certificate. Don’t use a resale certificate for any personal property – you may be penalized. Also, when you sell products to retailers, those retailers will give you a resale certificate that you should keep for your records. If you have any questions about using the resale certificate, get in touch! We’re happy to help. Retailer Sales Tax Requirements CANNABIS SALES TAX Retailers will collect the sales tax from their customers and remit it to the CDTFA. The sales tax rate is based on where your sale takes place. To find the correct tax rate, check the database on the CDTFA site. As we previously discussed, there are some key taxes with retailers and distributors must know about to stay compliant with California cannabis regulations. The two we’re outlining in this guide are the cannabis sales tax, and the cannabis excise tax.
Cannabis Sales Tax Retailers are primarily responsible for the sales tax, which applies to all “tangible personal property” in California – including cannabis, cannabis products, and cannabis accessories (rolling papers, vape pens, etc.). To calculate the amount of sales tax, use the total amount on your receipts (including the excise tax). The sales tax rate is based on where your sale takes place. Is it a sale that takes place over the counter in your store, or when you deliver the product yourself? For example, if you sell cannabis at your store location in Los Angeles, you may have a different sales tax than if you make a delivery to a customer in San Diego. To find the correct tax rate, check the database on the CDTFA site. Why are the tax rates variable by location? This is because the sales tax has three key components:
Check with your local municipality for your sales tax rate. Note that certain medicinal cannabis sales are exempt from sales tax. A customer is exempt from paying sales tax when they present a valid Medical Marijuana Identification card (issued by the California Department of Public Health), along with a valid government ID. Be careful: a doctor’s note or prescription isn’t sufficient for that customer to qualify for sales tax exemption. Keep track of these transactions – you’ll need to report any sales tax exemptions when you file your taxes! If you need help, give us a call or get in touch for a quick consultation. Cannabis Excise Tax Retailers and microbusinesses must collect an excise tax from their customers. As we outlined in this brief explainer for cannabis retailers, an excise tax is usually included in the price of the product, so you collect this tax from your customers every time you make a sale. Charge excise tax on everything from cannabis to cannabis edibles, oils, lotions, and waxes. How much should your excise tax be? The short answer: add on an extra 15% of the average market price to the listed retail price of your product. The average market price is based on the type of transaction between the seller and you. There are two types of transactions for you to know about:
Once you have determined whether you’re dealing with an arm’s length or non-arm’s length transaction, you can figure out how much your excise tax should cost. Check with your local municipality for your local excise tax rate. Here’s an example. You are a Los Angeles dispensary selling cannabis directly to a customer in an arm’s length transaction. The sale of one gram of cannabis is $20. On top of that, you charge an excise tax at 15% - so the sale goes to $23. Then you have to add Los Angeles sales tax (9.75%). The total out the door price is therefore $25.25. While this sounds complicated, the end result is simple. You are not required to list the excise tax separately on your receipt. However, you must have the phrase “The cannabis excise taxes are included in the total amount of this invoice” included on every receipt. Questions about the sales and excise tax rates? Get in touch – our experts are happy to help. While we’re not a law firm and cannot provide legal advice, there are a few key tax laws that cannabis retailers in California are responsible for now that cannabis is legal. The goal of this article is to give you an overview of these taxes and make you aware of your responsibilities as a cannabis business owner in California. In subsequent posts, we’ll dig into the excise, sales, and use taxes to give you everything you need to know about these tax requirements – and make sure your business stays compliant. For now, here are the basics you need to know.
Are you a cannabis retailer? You are a retailer if you sell cannabis and/or cannabis products directly to a consumer. Microbusinesses that are licensed as retailers also must abide by the same regulations as traditional retailers. A cannabis microbusiness is type of license category (Type 12) that allows your company to engage in multiple cannabis activities at one location. For example, as a microbusiness you could cultivate up to 10,000 sq. ft. of cannabis canopy and distribute your product under one license. Because often you are selling your product to a consumer, these microbusinesses follow the same regulations as retailers (detailed here). If you’re not sure whether you’re a cannabis retailer, get in touch with California Cannabis CPAs. First Steps to Becoming a Cannabis Retailer Before we dive into the tax law basics, a quick refresh: to be a cannabis retailer in California, you must start by applying for a seller’s permit and also secure local and state cannabis permits. Click this link to register with the CDTFA for a seller's permit. For details on what you need to get a seller’s permit – including a checklist of the documents you need to submit in your application – check out this blog post. Please keep in mind that you may be responsible for getting additional permits and licenses from your local county or city government. More on that to come! Next, if you are an existing cannabis retailer (i.e., not a new company) you are also required to report all your sales and pay sales tax due to the California Department of Tax and Fee Administration (CDTFA). The amount of tax you’ll pay is based on your gross receipts, meaning the tax rate is set based on where the sale takes place and when the sale is over the counter vs. when you deliver the item yourself. Finally, keep in mind that as you grow your business, you will be taxed on items you use that are purchased without tax – so hold onto your receipts and keep track of your inventory. Retailer Tax Law Basics There are a few key taxes that retailers are responsible for as of January 1, 2018. Cultivation Tax Anyone who cultivates cannabis is responsible for paying a cultivation tax – including retailers who grow their own cannabis. Pay this tax to the distributor in a similar process to the excise tax collection. Current cultivation tax rates are $9.25 per dry-weight ounce of cannabis flowers, as well as a tax of $2.75 per dry-weight ounce of cannabis leaves. Exempt from the cultivation tax are businesses that cultivate cannabis for personal use or by a qualified patient or primary caregiver -- i.e., medical cannabis cultivators. Cannabis Excise Tax An excise tax is a fancy name for a tax paid when purchases are made on a specific good – like cannabis and cannabis related products. The excise tax is usually included in the price of the product, meaning you’ll collect this tax from your customers every time you make a sale. Charge excise tax on everything from cannabis to cannabis edibles, oils, lotions, and waxes. How much should excise tax be? Add on an extra 15% of the average market price to the listed retail price of your product. The average market price is based on the type of transaction between the seller and you. We will dig into this in detail later on. Note that you are not required to list the excise tax separately on your receipt – this makes it much easier for you to pay your sales tax, as you will see in the following section. You do need to have the phrase “The cannabis excise taxes are included in the total amount of this invoice” included on every receipt. Sales Tax There remains an exemption for sales and use tax for all medicinal cannabis products, but usually, as a retailer, you will need to pay sales tax. Sales tax applies to retail sales of “tangible personal property” in California – in plain terms, this means anything you can touch and feel, including cannabis, cannabis products, and cannabis accessories such as rolling papers, vape pens, or pipes. When calculating the amount of sales tax due, you must include the amount of your excise tax in the receipts. Since the excise tax should be included in your total sales price, this shouldn’t require any additional effort from you in totally your gross sales tax. You are liable for sales tax even if you don’t collect sales tax reimbursement. This means you must pay the excise tax even if you don’t sell the product. How much is your sales tax? That depends. The sales tax rate is based on where your sale takes place when it is over the counter, or when you deliver the product yourself. So, for example, if you sell cannabis at your store location in Los Angeles, you may have a different sales tax than if you make a delivery to a customer in San Diego. All tax rates are on the CDTFA website – and more on this tax to come. Use Tax Use tax is a tax on items you use or consume that you purchased without paying tax. An example of a use tax in everyday life might be a tax on getting a massage. The use tax rate is the same rate as your sales tax rate. Broadly, expect to pay use tax on items you purchased outside the state of California without paying California state sales or use tax. If this sounds confusing, it is. We’ll cover in greater detail what kinds of products you can expect to pay use tax on in future posts. In the meantime, if you have any questions, don’t hesitate to reach out to the experts at California Cannabis CPAs! Happy New Year and welcome to a world where cannabis is officially legal in the state of California! We hope this year brings big things for your business. To help you stay on track, we’re helping you start off the year right with a checklist of all the forms your business will need come tax time. Whether you’re filing for the first time or a seasoned pro, take a look at this list to make sure your business is prepared. Questions? The experts at California Cannabis CPAs are here to help. Just let us know! What you Need to File Your Taxes Cultivators and retailers of cannabis products must pay a cultivation and excise tax to the distributor. Distributors are required to electronically file a tax return with the CDTFA on the last day of the month following the reporting period. This is where you file both the cannabis taxes and sales taxes. To file your return, you need the following things:
Check out the graphic below for a breakdown of collected taxes from commercial cannabis businesses in California. State vs. Federal Taxes for California Cannabis Companies
Starting in this month, California is introducing a 15% state excise tax on every purchase of a cannabis product. Retailers are required to charge that tax on customers at the point of sale -- and you will need to keep track and report that accounting when you file your own taxes. Likewise, it will be mission critical to keep track of the California licenses and permits you need before tax time. The cultivation and excise taxes will be collected by distributors from cultivators and retailers and paid to the California Department of Tax and Fee Administration. As for the federal tax system, your cannabis business should file an income tax return just like any other business. What you file will depend on your business entity -- the way you’re structured. For example, a corporation would file a Form 100, California Corporation Franchise Tax or Income Tax Return. The main difference in filing your taxes will be in the deductions, credits and records you’ll be asked to submit at the time of your filling. To convert your nonprofit cannabis company into a for-profit, check out this guide. Or, if you’re just getting started setting up your business structure, you may want to take these tax ramifications into account. Local Taxes Not only will you have California state taxes, but there are also local taxes and fees to pay. Cities and counties may impose additional taxes to produce revenue for their community, and fluctuating tax rates depend on where your cannabis company operates and is located. To find your local tax regulations, contact your municipality. Have questions about being prepared for tax time? Get in touch, we’re happy to help! This past November, the California Department of Public Health's Manufactured Cannabis Safety Branch (MCSB) released Emergency Regulations that outlined the licensing procedures for the manufacturing of cannabis products. Here’s a quick guide reviewing the standards and practices you need to know to be compliant in 2018. Types of Licenses As you already know, It is illegal to manufacture cannabis product without a valid license -- and this will continue to be the case after cannabis is legalized on January 1, 2018. A license is needed at each of the premises in which cannabis is manufactured. There are two types of licenses:
It is important to note that these licenses are non-transferrable. In addition, those that are employed by an agency in California or hold office are not authorized to hold a manufacturing license. License Application Requirements The application deadline is fast approaching for 2018. There are also different protocols and detailed information that must be submitted with each license application. Temporary License Application The MCSB will issue temporary licenses to allow a business to engage in commercial cannabis activity. These licenses are valid for 120 days. You may extend for an additional 90 days if the business has submitted a complete annual license application. The application can be submitted via snail mail or email. Once received, the CDPH will have 10 days to respond. The temporary licenses have no fees associated with them and the CDPH began accepting them December 8, 2017. Here is the temporary license application from the official website: Temporary License Application. Annual License An online system is due to launch this month will allow manufacturers to submit applications for the annual license. Check the CDPH website for updates on the online submission portal. This application is quite extensive and will require you to submit the following information:
This annual license application is very lengthy and will require proof of details for many of the latter items. GreenGrowth CPAs suggests reading the official bill thoroughly to ensure you submit the proper detailed information about items such as security procedures, quality control, transportation and waste disposal. Of course, if you have any questions, don’t hesitate to let us know! We’re here to help. Application and License Fees A nonrefundable application processing fee of $1,000 is required for each new application. Annual license fees are based upon a sliding scale.
Priority in issuance of licenses shall be given to qualified applicants that can demonstrate that the commercial cannabis business was in operation under the Compassionate Use Act as of September 1, 2016. The department also has a right to deny applications for new or renewal licenses for any reason.
License Renewal If you would like to renew a manufacturing license, it must be submitted to the department at least 30 calendar days prior to the expiration date of the current license. A renewal application will not be accepted more than 60 calendar days prior to the expiration of the current license. If a renewal application is submitted after the expiration date, a $500 fee is charged in addition to application fees. More so, if the renewal is not submitted within 30 calendar days after the expiration date you will lose your ability to apply for license renewal. Instead, it is required you submit a new license application. If you’re planning on launching your business in 2018, you’ll also need a seller’s permit to do so. Read our guide for additional information about securing your seller’s permit before 2018. There are many policies and regulations that will continue to evolve in 2018. GreenGrowth CPAs will continue to update our site to bring you the latest information about selling, growing and manufacturing cannabis. How to convert your cannabis nonprofit into a for-profit (and put more money in your pocket)12/18/2017
There’s more big news for cannabis businesses as we roll closer to 2018 and the start of legal cannabis in California! Existing cannabis nonprofits who wish to convert to a for-profit entity can file with the California Secretary of State to do so starting January 1.
Why would you consider converting a non-profit to a for-profit? There are two big drawbacks to being a non-profit to consider:
Therefore, if you’re interested in building a business and selling it, or making a profit that you don’t need to reinvest back into your business, a for-profit would be the way to go. Sound like a promising model? Here’s what you need to know to convert your cannabis non-profit into a for-profit. Who does this apply to? First, remember that everyone starting a cannabis business in California needs to file with the Secretary of State. Specifically, entrepreneurs seeking to start a cannabis-related business in need to register their business entity, as well as any trademark or service mark. Next, if you’re an existing nonprofit -- a mutual benefit corporation or a cooperative corporation -- and you wish to convert to a for-profit entity, you must register this change with the Secretary of State starting January 1, 2018. This applies to any businesses looking to become a Corporation, Limited Liability Company (LLC), Limited Partnership (LP) or limited Liability Partnership (LLP). If you’re a new business, you are required to register with the Secretary of State before applying for any license(s) with other local and state agencies. Not sure what business structure is right for you? Luckily, there’s a guide for that. The California Secretary of State has this overview of the different forms your canna-business can take. Of course, if you have any questions about the differences between a corporation, LLC, LP, or any of the other options, GreenGrowth CPAs are here to help. Steps for Registering Your Cannabis Business The office of the Secretary of State has set up an online portal to make the process of registering your business relatively straightforward. (And if you like Cheech, there’s a great PSA to go with the new site that you should definitely watch.) Follow these simple steps to get your business registered correctly.
This is a lot information to take in, and if you’re feeling overwhelmed, GreenGrowth CPAs are here to help. Get in touch with any questions and we’ll guide you through the registration process. EMERGENCY RELEASE: CALIFORNIA CANNABIS DISPENSARIES MUST PAY TAXES BEFORE GETTING SELLERS PERMIT
What happened: In news this week, California’s Department of Tax and Fee Administration is requesting dispensaries to pay any unpaid taxes before getting a seller’s permit. It’s an effort to bring those gray-area operators who haven’t formally been paying taxes up to code before the marijuana industry takes off in 2018. For any businesses already growing or selling cannabis, the California state government will request that all dispensaries must pay their taxes before applying for a sellers permit. Why is it important: The cannabis industry in California is projected to bring in $1 billion in taxes by 2020, and the government wants to kickstart that windfall early. Not only that, but regulators are hoping to quash any lingering black market operators. The goal in requiring operators to pay back-taxes is to bring the industry above board before January 1 -- not to punish any existing operators, says one expert. Therefore, the state is likely to continue to work with any business owners who still want to get a seller’s permit and haven’t yet paid their taxes. What you need to do now: If you’re one of those gray areas operators, start to go through your records to determine how much tax you potentially owe before January 1. Under the state’s recent legislation, retailers and growers need temporary business permits from their individual towns or jurisdictions. These permits will last for four months, at which point they will be approved by state regulators for the official seller’s permit. That means now is the time to catch up on any lingering back taxes -- or risk getting shut down four months from now. Questions on how this applies to you? Get in touch with the experts at California Cannabis CPA today to get some advice on how to best proceed for your canna-business. We can help you easily get caught up on your taxes and get your return filed in a week! So, you want to start a business in California’s booming cannabis industry. Now seems like the perfect time to get in on the ground floor: the market estimates that cannabis will bring an additional $5 billion to California each year. It would be nice to get a slice of that pie, no?
Before you dive in, take some time to learn about the different ways to structure your business in a way that will give you the biggest slice of the pie -- not the leftover sliver that’s all crust (unless crust is your thing). The way you setup your company can mean the difference between growth and success and burning out after a year in business. Ask these five tax questions when setting out to structure your canna-business! 1. What kind of legal entity do you want to be? Historically, before California decided to have a fully regulated state system for medical marijuana, cannabis companies were set up as non-profits. Now, there are other options for structuring your business. Figuring out which model is right for you depends on many factors, including your role in the cannabis industry (i.e. grower, distributor, or partner); county and local regulations; and your projected growth. Here are some options available: Nonprofit (allowed pre-2018):
For profit (allowed in 2018):
2. What are your growth goals? Do you plan to have multiple locations and holdings? Depending on how your business operates, you can structure to account for different levels of liability. If you have multiple corporate entities, for example, you can limit your liability within each one. Then if one of your locations is sued or forced to shut down, your other locations can continue to operate independently. Conversely, managing multiple corporate entities can be a logistical nightmare -- especially if you intend to grow big or go home. It is much more efficient to run all your branches under one corporate entity if you’re smart about handling your risk. 3. What are your investors looking for? Investors will be interested in your company’s assets, inventory, cash receivables, and profit potential. They will want to see your business model in all its parts: trademarks, intellectual property, physical locations, and more. When you want to raise some serious capital -- going beyond your personal investment and a Kickstarter campaign -- the way you structure your company can impact an investor’s interest. For example, in a multi-entity structure with different locations and sub-companies, an investor can pick and choose which parts of your business they want to fund. Having a multi-entity structure can be very attractive if you’re shopping your canna-business around to people with low risk tolerance (and it widens your potential pool of funders). However, different ownership stakes can start to lead to conflicting interests for you as a manager. Having a seat at many tables with multiple influential voices can cause some real cross-company conflicts for you as a leader. 4. How should you structure compensation and benefits? Cannabis tax regulations have two special rules. First: cannabis companies can deduct the cost of goods sold on their tax return. Second: cannabis companies cannot deduct any sales and marketing expenses. Ouch. What this means is that many traditional expenses can’t be claimed as decreed by tax law section 280E. Know the ins and outs of payroll tax, executive compensation, and healthcare benefits you’ll be accountable for as a business owner in the California cannabis industry. The best way to do that is to consult with a tax professional in your community. 5. What do you need to do to be compliant? This is a big question -- and pretty broad at that. If you’ve made it this far, this step is the most crucial. Knowing what forms you need to fill out, what licenses you need, and how to best account for your expenses is what will make or break your business in the long run. California Cannabis CPA will be releasing more guides and checklists in the coming weeks to help you keep track of everything, but know that compliancy varies by district, county, and between the federal and state levels. If you’re going to have locations in different parts of California, do the research for each area you’re operating in. When in doubt -- pay your taxes! |