Category: Taxes

California Cannabis Taxes By City

2/22/2017

California City Taxes for Medical and Recreational Marijuana

In November 2016, California passed Proposition 64 which legalized recreational marijuana in the state of California. At the same time, voters voted on a number of city tax ordinances which were designed to apply local city taxes to the cultivation, manufacturing, distribution, and sales of medical and recreational marijuana.

With 482 municipalities in California in all, dozens of ballot measures were up for vote in November 2016. For several cities, we have provided summaries of each of the tax laws that have been passed below. While this is only a partial list of the measures that were passed it can help you to get a clearer picture of what taxes you will be required to pay based on where you locate your cannabis business.

Adelanto. The city imposes a commercial marijuana activity excise tax of up to 5% of revenue. Taxable commercial marijuana activities include all business activities licensed, authorized, or otherwise permitted by State or local law, including the transportation/distribution, testing, and dispensing of marijuana.
Carson. Carson imposes a tax of $25 per square foot for marijuana cultivators and 18% of gross proceeds on all marijuana business activities pending the passage of a future ballot measure that permits such activities. The cultivation tax is adjusted annually based on the Consumer Price Index (CPI).
Cathedral City. The city's marijuana tax, applied to both medical and recreational marijuana, is $25 per square foot of cultivation space and $1 per gram of cannabis concentrate and per unit of cannabis-infused product. The City Council retains the right to impose the tax at an amount that is lower than what has been approved by the voters.
Coachella. The city imposes a tax of $15 per square foot on marijuana cultivation and manufacturing facilities. An additional tax of 6% of revenue is charged on both medical and recreational marijuana sales. Coachella permits only wholesale marijuana activities not recreational sales.
Coalinga. Measure E establishes an annual tax for commercial marijuana operations of $25 per square foot for the first 3,000 square feet and $10 per square foot for the additional remaining space for commercial marijuana operation spaces. Measure G authorized the operations of a single marijuana dispensary. The city imposes a tax of 10% of gross receipts on this marijuana dispensary. No other marijuana dispensaries would be allowed in the City of Coalinga.
Dixon. The city imposes a 15% tax on the gross receipts of cannabis businesses and dispensaries if such businesses or dispensaries are approved to operate in the City of Dixon. Dixon passed an ordinance prohibiting cultivation and distribution of medical marijuana in January 2016.
Fillmore. Under Measure I, the city imposes a 15% on all medical and recreational marijuana sales within the city to be paid only by the marijuana business itself. Measure H enacts a permanent tax of $30 per square foot for the first 3,000 square feet of space, and not to exceed $15 per square foot for the remaining space on space used for cultivation by medical and recreational marijuana businesses. The tax will also increase every five years at the rate of the greater of CPI or $1.00 and $0.35. The sale of marijuana in Fillmore is currently prohibited by the Fillmore Municipal Code.
Gonzales. The city imposes a tax on all cannabis cultivation and manufacturing businesses, which authorizes the city to charge an initial tax of $15 per square foot of space dedicated to cannabis cultivation with the ability to raise this tax after three years up to a maximum of $25 per square foot. In 2020, this cultivation tax will be subject to annual adjustments based on the CPI. It also establishes an initial tax rate of 5% on the annual gross receipts of cannabis manufacturers with the ability to raise this rate after 3 years to a maximum of 15% on gross receipts.
Greenfield. The city imposes a tax on all for-profit and nonprofit cannabis cultivation businesses of $15 per square foot of canopy space authorized by city permit until June 30, 2020. For every year thereafter, the tax would be increased by $5 per square foot, not to exceed $25 per square foot. On July 1, 2023, the tax would be increased annually according to the CPI for inflation. Initially, commercial nursery cannabis cultivation operations would pay an initial tax of $2 per square foot of canopy space as authorized by city permit until June 30, 2020. Every year thereafter, the tax would be increased by $1.50 per square foot, not to exceed $5 per square foot. Then, starting on July 1, 2023, the tax would increase annually according to the CPI for inflation. A commercial cannabis nursery is a business that produces only immature plants, seeds, or products that are used specifically for the planting, propagation, and cultivation of cannabis. The city imposes a general tax of $5 on gross receipts per fiscal year on all other types of cannabis businesses. Beginning July 1, 2020, the tax rate would be increased by 2.5% per year, not to exceed a maximum tax rate of 10% per year.
Grover Beach. Grover Beach imposes a tax at the rate of 5% of gross receipts on dispensaries, manufacturing, testing and other medical cannabis businesses and 10% of gross receipts on recreational cannabis businesses. The city imposes a tax of $25 per square foot for the first 5,000 square feet and $10 per additional square foot of cultivation space for cannabis cultivation and nursery businesses. The tax for both cultivation and nursery operations would be paid on the maximum canopy area permitted or licensed under state laws and city regulations, regardless of whether the grower utilizes the entire space. The tax is subject to annual CPI adjustments.
Hayward. The passage of the ballot authorized the city to impose a general tax not to exceed 15% on the gross sales of the adult use of recreation and medical cannabis. The city may impose a tax rate that is lower than 15% at a later date.
King City. King City imposes a tax on medical and recreational marijuana cultivation businesses at a rate of $25 per square foot for the first 5,000 square feet and $10 per square foot thereafter for cultivation. The tax may not exceed $5 per square foot for nurseries; $30,000 each for manufacturing and testing facilities. The tax is subject to an annual CPI-based adjustment for inflation. The tax for both cultivation and nursery operations starts at an initial rate of $5 per square foot for the first 5,000 square feet and $2.50 per square for any additional space. It would be paid on the maximum canopy area permitted or licensed under State laws and City regulations, regardless of whether the grower utilizes the entire space.
Long Beach. Marijuana businesses, including cultivators, dispensaries, and manufacturers are required to pay taxes under Measure MM. For medical marijuana dispensaries this tax is a 6 to 8% tax on gross receipts. For recreational dispensaries, it is 10 to 12% on gross receipts. For cultivators, it is $12 to $15 per square foot of cultivation space. For marijuana manufacturers, it is 6 to 8% of gross receipts. Measure MM also amended the city's current marijuana business license tax, which was approved in 2014.
Perris. The city imposes a tax of $25 per square foot on medical marijuana cultivators and 10% of monthly business revenue for medical marijuana dispensaries. The tax on medical marijuana dispensaries is not a sales tax.
Pittsburg. The city imposes a tax on all for-profit and nonprofit medical and recreational marijuana businesses within the city of no more than 10% of gross receipts. Personal cultivation of marijuana that is not sold, bartered or exchanged is excluded from this tax.
Point Arena. The city imposes a maximum tax on recreational cannabis businesses of $0.10 for each $1 or fractional part of the business proceeds. For medical marijuana/cannabis businesses, the tax would not be more than $0.03 for each $1 or fractional part thereof. The City Council retains the authority to periodically adjust the tax rates as long as the rate does not exceed these maximum rates with any increases in the maximum rates to be approved by the voters.
Salinas. For both for-profit and not-for-profit cultivation businesses, the city imposes a general tax of $15 per square foot of canopy area. After three years, the tax rate automatically increases to $25 per square foot of canopy area and is automatically adjusted based on the CPI. For marijuana dispensaries, manufacturing, and delivery businesses, the city imposes a tax rate of 5% of gross revenues. After three years, this tax rate automatically increases to 10% of gross revenue for these businesses.
San Diego. The city imposes a tax, ranging from 5 to 15% on the gross receipts of recreational marijuana businesses.
San Jacinto. The city imposes a gross receipts tax of up to 15% and up to a $50 per square foot cultivation/manufacturing tax on all commercial marijuana and marijuana-containing product businesses in the city. In 2016, the San Jacinto City Council adopted a comprehensive ban on all marijuana uses. However, under Proposition 64, the city is required to reasonably allow indoor cultivation of medical and recreational marijuana.
San Leandro. The city imposes a 10% tax on gross receipts for all for-profit and non-profit medical and recreational marijuana businesses.
Santa Barbara. The city imposes a 20% maximum tax on gross receipts for all medical and recreational marijuana businesses.
Santa Cruz. The city imposes an initial tax rate of 7% of gross receipts for cannabis businesses operating in the city with a maximum tax rate of 10%. The ordinance includes both for-profit and nonprofit medical and recreational cannabis businesses.
Stockton. The city has increased its business license tax rate to a minimum of $5 and maximum of $50 per $1,000 of annual gross receipts for medical marijuana businesses.
Watsonville. The city imposes a tax on marijuana cultivation at a maximum rate of $20 per square foot per year of canopy area and maximum rate of 2.5% of gross receipts from the manufacture or processing of cannabis. From the sale of cannabis, the city imposes a tax of a maximum of 10% on gross receipts.

The California medical sales tax rate is 7.60%. The majority of these ballot measures do not address the sale of recreational marijuana directly because they left it up to the passage of state laws and/or additional city ordinances to determine whether or not recreational cannabis would be considered legal in their municipalities.

With the passage of Proposition 64, in many cases, these city ordinances now also apply to recreational cannabis businesses. For more specific details, please check with each city to determine the exact ordinances that apply to your medical or recreational cannabis business.

Tax Responsibilities for California Cannabis Companies

1/9/2017

On November 8, 2016, California voters opted to legalize cannabis for recreational use through Proposition 64. Proposition 64, known as the Adult Use of Marijuana Act (AUMA) legalizes and regulates recreational cannabis in the state of California. Proposition 64 will also add state taxes for licensed dispensaries and cannabis cultivators.

15% Medical Marijuana Tax

In 2018, all retail sales of cannabis will be subject to a 15% marijuana excise tax. Although the purchaser of the cannabis or cannabis product technically owes the tax, the seller will actually be obligated to collect the tax, as well as, any other sales and use taxes that apply in the state of California. However, there is one exception that makes businesses and customers exempt from this excise tax. That is, if the individual purchasing the medical cannabis or medical cannabis product provides a state-issued Medical Marijuana Identification Card.

Until now, qualified patients and caregivers have not been required to register as medical marijuana patients with the state. However Proposition 64 will require that these individuals obtain the identification cards if they want to be exempted from the excise tax.

Cultivation Tax for Cultivators

In 2018, all licensed cannabis cultivators, excluding those patients and caregivers who cultivate cannabis for personal use, will be required to pay a cultivation tax on all marijuana that is harvested to be sold on the commercial market per the Compassionate Use Act. The tax will be assessed at the rates of $2.75 per ounce of leaves and $9.25 per ounce of flowers.

Local Taxes for Licensed Cannabis Businesses

The Medical Cannabis Regulation and Safety Act (MCRSA) and Proposition 64 will enable California cities and counties to impose local taxes on licensed marijuana businesses. Several municipalities opted to include their own local tax measures on the recreational marijuana ballot for November 8.

Northern California

In certain Northern California counties, including Calaveras County, Humboldt County, Lake County, and Monterey County, the cultivator taxes will be based on the grow's total square footage. Mendocino County has opted to place two tax measures on the ballot. These measures are from the County's Board of Supervisors and local marijuana advocates. They both suggest a 2.5% tax based on the gross sales of medical marijuana and the latter having a higher 5% tax on recreational sales of cannabis.

Southern California

In Southern California, a San Diego tax measure proposal looks to tax dispensaries at a rate of 5% that will rise over time to 8% in 2019. However, a Santa Barbara tax measure looks to tax cannabis businesses at a 20% tax rate. Several Southern California towns have already began taxing cannabis businesses. Coachella is set to vote on a tax measure that will add quarterly taxes of up to 6% for gross sales and 15% per square foot.

Internal Revenue Code 280 and its application to California Corporations

11/10/2016

Under Internal Revenue Code (IRC) Section 280E, no individual is permitted to take a deduction or credit on income taxes if the income resulted from carrying on any trade or business if the business consists of trafficking in controlled substances, such as marijuana, under the Controlled Substances Act (CSA). This section of the IRC was designed to prohibit individuals from taking individual tax deductions from marijuana sales. However, how does federal tax law apply to California corporations, s-corps, LLCs for the purposes of deducting expenses?

California Corporations and the Revenue and Taxation Code

The differences between federal law and California state laws have created an unique situation for California marijuana businesses due to the treatment of income and expenses for personal income tax (individuals and partnerships) versus corporation tax law (including statutory cooperatives).

For individuals and partnerships, Revenue and Taxation Code Section 17282 has prohibited taxpayers from taking deductions on any of his or her gross income as a result of income derived from illegal activities, including drug trafficking. However, the taxpayer must be found to have engaged in these activities first due to a criminal or other proceeding in which the state, county, city, or other subdivision was a party.

For corporations, including statutory cooperatives, California has enacted a stand-alone law. A statutory cooperative is a cooperative that has organized and registered as a corporation under the Corporations or Food and Agricultural Code (Id. at Section 12311(b)).

According to California tax law, an entity that is taxed as a corporation per Part 11 of the Revenue and Taxation Code and is also involved in medical marijuana activity is permitted to deduct its ordinary and necessary businesses expenses, along with the cost of goods sold, provided that the entity can substantiate any deductions that it claims with adequate records.

How California Classifies C Corporations, S Corporations, and LLCs

In California, a C corporation refers to an entity that is doing business in California, organized in California, or registered with the California Secretary of State. A C Corporation is business entity that is taxed as a separate entity from its shareholders. The C Corporation pays corporate taxes on its profits while the shareholders are not taxed on the C corporation's profits. The shareholders of a C corporation only report and pay taxes on the income that is paid to them by the corporation.

In addition, California also has specific definitions for corporations that are S corporations or LLCs:

S Corporation. In California, an entity that has elected to be taxable as an S corporation for federal tax purposes is also treated as an S corporation for California tax purposes. Electing to be treated as an S corporation eliminates the "double taxation" that applies to C corporations because the S corporation itself does not pay federal income tax, only the shareholders do.

LLC. In California, an LLC is a hybrid-business entity that blends elements of the sole proprietorship, partnership, and corporate structures. If an LLC makes the election to be classified as a corporation for federal tax purposes, it must also file for this same classification with the state per California tax law. As a result, an LLC that has not elected to be treated as a corporation for tax purposes, may be considered as a sole proprietorship or partnership for federal and state tax purposes.

The owners of LLCs that have not made the election for the LLC to be classified as a corporation for federal tax purposes are not required to pay a salary so they can take their earnings as distributions. Therefore, when they report the net income for the LLC, there may be no salary expenses to be disallowed under Section 280E. Additionally, if the owners are involved in the selling, marketing or delivery of marijuana and they do take a salary, this salary expense is disallowed under Section 280E.

However, if the LLC is taxed as a C corporation, the LLC owners are required to pay themselves reasonable salaries, and this salary expense may be disallowed under Section 280E.

California Tax Law Does Not Automatically Conform to Federal Tax Law

In California, individuals are bound by the provisions of Section 280-E. However, this tax law does not automatically conform for corporations. This is due to the fact that California law has not been designed to conform to changes in federal tax law, except under specific circumstances. Instead, California policy makers are required to affirmatively conform to changes in federal tax law.

However, legislative sessions in California do not systematically address nonconformity with federal law and they haven’t in sometime. In fact, the last time that California policy makers agreed to address nonconformities with federal tax laws on an annual basis occurred from the years 1982 through 1992. Beginning in 1992, the California Legislature stopped enacting annual conformity bills that were designed to require policymakers to act on federal tax law changes by a specified date each year.

As a result, several nonconformity issues, such as the nonconformity of California corporations with Section 280-E of the IRC, have gone unaddressed.

Hemp VS. Marijuana Tax Compliance

10/18/2016

When it comes to taxes, many hemp businesses are unsure about Internal Revenue Code Section 280-E and whether or not it applies to their businesses. Section 280-E was passed in order to prevent drug dealers from taking business deductions on income from trafficking in controlled substances, like cocaine and marijuana. Here is what you should know about growing hemp versus marijuana and its application to 280-E.

Hemp Growers

The cultivation of hemp has been considered by the federal government to be a violation of the Controlled Substances Act because hemp is botanically related to marijuana. In addition, hemp also contains low levels of THC, which is the same psychoactive substance found in marijuana. These properties are why the government sought to include hemp by default in the Controlled Substances Act.

The government did make some distinction between hemp and marijuana with the passage of the Agricultural Act of 2014, which removed the federal restrictions on growing industrial hemp and permitted any states that have legalized the manufacturing of hemp to set up research programs in order to study the benefits of cultivating hemp.

Since the federal government has failed to create an exception for hemp in the list of Schedule I substances of the Controlled Substances Act, Section 280-E still applies to hemp growers and hemp distribution businesses.

As a result, hemp growers still face the same restrictions on permitted deductions as marijuana growers when it comes to taxation. The full list of deductions that are available to hemp growers can be found here.

Hemp Distributors

In the same way that hemp growers are treated like marijuana growers for taxation purposes, hemp distributors must also follow the same rules as marijuana distributors. The full list of deductions that are available to hemp distributors can be found here.

Tax extensions are due October 17th, 2016

10/10/2016

Tax Extensions Due on October 17th, 2016 from Derek Davis on Vimeo.

IRS Audits and Form 8300 - What Is It and Why Is It Important?

9/17/2016

The IRS is getting tough on cannabis business in Colorado and is going after cannabis entrepreneurs who failed to fill out Form 8300. If you want to avoid being audited by the IRS, it is important for you to stay on top of these filings. Here is what Form 8300 is and why it is important.

What Is Form 8300?

Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, is a form used by the federal government to keep track of cash payments of more than $10,000. These filings are designed to assist law enforcement in investigating and preventing money laundering, tax evasion, drug dealing, financing of terrorism activities, and other criminal acts.
For purposes of Form 8300, cash doesn't only include U.S. dollar coins and bills and foreign currency notes; it may also include cashier's checks, bank drafts, traveler's checks, and money orders if the face value is $10,000 or less.

These filings are designed to assist law enforcement in investigating and preventing money laundering, tax evasion, drug dealing, financing of terrorism activities, and other criminal acts.

Who Must File Form 8300?

Every person who engages in a trade or business and also receives more than $10,000 in cash in a single transaction or in two or more related transactions is required to file Form 8300. Transactions that are considered related transactions are those that are conducted between a payer (or its agent) in a 24-hour period. The transactions may also be considered related if the recipient of the payment knows that each transaction is a part of a series of transactions.

The IRS has also issued IRS Form 8300 Reference Guide to help you determine which transactions qualify as reportable transactions. Cash doesn't only include U.S. dollar coins and bills and foreign currency notes. It may also include cashier's checks, bank drafts, traveler's checks, and money orders if the face value is $10,000 or less.

Form 8300 Filing Examples

Here are two examples to help you understand when you need to file Form 8300:

Example 1. Jack asks an employee to purchase cannabis for his dispensary. The employee orders the product in two shipments and he pays with two cash payments, each for $6,000. The cannabis grow business who received more than $10,000 in the designated reporting transaction must file Form 8300.

Example 2. A cannabis supply shop sells growing equipment for $9,000 in cash to Adam at 10 a.m. During the afternoon on the same day, Adam returns to buy more equipment and pays an additional $9,000 in cash. Since, both transactions occurred within a 24-hour period, they are related transactions and the grow equipment supplier must file Form 8300.

When Do I File Form 8300?

Each time you receive a payment that meets the criteria for filing Form 8300, you must file the form for the transaction within 15 days of receiving the payment. You can file online using the Bank Secrecy Act (BSA) Electronic Filing (E-Filing) System at the FinCEN website.

What Are the Penalties for Failing to File Form 8300?

If you simply fail to file Form 8300 on time, a penalty of $250 per occurrence will be assessed. This penalty is capped at $1,000,000 per year for businesses with gross receipts not exceeding $5 million. If you fix the error and make sure that the forms are filed within 30 days of the deadline, then this penalty limited is reduced to $175,000 per year for businesses with gross receipts not exceeding $5 million. However, if your business grosses more than $5 million, then the penalty cap increases to $3 million.

However, if you intentionally fail to file Form 8300, the penalty increases to $25,000 of the total amount of the transaction, up to a maximum of $100,000 for each time that you failed to file. In addition, felony charges may be brought against you in more severe cases. Criminal penalties will be applied by default if you structure or appear to structure payments in order to avoid filing Form 8300 for the transactions.

Applicable Tax and License Requirements for California Medical Marijuana Dispensaries

8/12/2016

California dispensaries are required to meet a variety of tax and licensing requirements in order to operate legally in the state of California. Obtaining proper medical marijuana licenses is key to compliance. Below is a list of several applicable taxes and licensing requirements for dispensaries in California.

California Medical Marijuana Regulation and Safety Act (MMRSA)

In California, all dispensaries are regulated by the California Medical Marijuana Regulation and Safety Act (MMRSA), which is made up of three laws, Assembly Bill 266, Assembly Bill 243, and Senate Bill 643. AB 266 allows for businesses to obtain operational medical marijuana licenses from the state of California. It also legalizes all commercial cannabis activities by licensed California dispensaries. It gives local jurisdictions the power to tax and assess fees against California dispensaries. AB 243 regulates cannabis growers and SB 642 sets licensing standards for physicians who recommend medical marijuana to patients.

Tax Treatment

The state of California disallows the deduction of all business expenses for medical marijuana dispensaries that are not being taxed as a corporation under the State Revenue and Taxation Code. However, if the dispensary is structured in order to be taxed as a corporation, the deduction of all necessary and ordinary businesses expenses is permitted, as long as the dispensary maintains the proper records to support such deductions.

Seller's Permit

The state of California requires all dispensaries, including mobile dispensaries, to apply for a seller's permit with the Board of Equalization (BOE). There is no fee to apply for a seller's permit and it can be done via the BOE's Online Registration.

Sales Tax

All retail sales of medical cannabis products and accessories are subject to California sales tax. California dispensaries are required to pay sales tax on a quarterly prepay, quarterly, monthly, fiscal yearly, or yearly basis based on the dispensary's reported sales or anticipated taxable sales at the time of registration for a Seller's Permit with the BOE. The statewide sales tax rate is 7.5%.

However, California dispensaries should also pay close attention to the laws regarding the taxation of medical marijuana as changes are expected soon. The California Senate is currently considering SB 987, a new bill introduced in February 2016, which would impose a 15% tax on the sale of medical marijuana to patients.

Resale Certificates

To mitigate having to pay taxes on purchases of medical marijuana and marijuana-related products, dispensaries must obtain a resale certificate to present to the supplier at the time of purchase. These resale certificates are available at California office supply and stationery stores and should include the necessary information to ensure that the form is a Board-approved retail certificate. One resale certificate should be kept on-file per vendor and the same resale certificate can be used each time a purchase is made from that specific vendor.

Payroll Tax

If your dispensary has employees, you will also be required to report wages and pay Income tax, Social security and Medicare taxes to the Employment Development Department (EDD) on a quarterly basis. The full requirements for reporting and depositing payroll taxes in California can be found here.

Record Keeping

California dispensaries are required by law to maintain specific records so that the Board of Equalization can verify the accuracy of filed sales and use tax returns. These records must be maintained for at least 4 years. These records include sales and purchase records, bank statements, resale certificates, shipping documents, and tax returns. A comprehensive list of the books and records that are required to be maintained can be found here.

Depending on the other products and services that your business provides, there may also be other state taxes that apply to your business, including property tax and special taxes. Contact the appropriate offices to learn more.

Cost of Goods Sold Adjustments for Medical Marijuana Related Companies

8/5/2016

As a cannabis reseller or producer, you may have the option to deduct COGS for certain expenses related to the operation of your business. These deductions can offer some substantial tax savings for your business, as the deduction options for cannabis businesses are limited to COGS due to § 280E of the Internal Revenue Code (IRC).

When the IRS Office of Chief Counsel issued Chief Counsel Advice (CCA) 201504011 in 2015, this memo was designed to clarify the COGS deductions that are available to cannabis businesses. The IRS determined that the specific IRC sections that govern the items that can be included as COGS for cannabis businesses are §1.471-3(b), in the case of a cannabis reseller, and §1.471-3(c) and 1.471-11, in the case of a cannabis producer.

While these regulations outline the general categories of deductions that are permitted for cannabis businesses, they do not detail what specific items cannabis businesses can deduct. To help you sort things out, here are some examples of the costs that you should include in your COGS basis for your canna-business so that you know exactly which items are deductible.

COGS for Cannabis Resellers

According to §1.471-3(b), the IRS has interpreted this section of the IRC to mean that cannabis businesses are permitted to deduct expenses related to inventory as COGS only. As result, cannabis resellers can claim deductions for:

●The invoice price for cannabis, less trade or other discounts
●Electric bills for designated inventory areas (electricity used in sales areas are not eligible to be deducted as COGS)
●Transportation (the cost of travel to purchase cannabis, transportation and shipping costs of the cannabis)

Cannabis resellers are permitted to take these deductions only as long as these charges are strictly related to the acquisition of cannabis for resale and the storage and handling of inventory. The best way to ensure that the IRS will not challenge these deductions is by creating an inventory space that is closed off from the sales area of your cannabis business.

COGS for Cannabis Producers

For cannabis producers, §1.471-3(c) and § 1.471-11 of the IRC define how these businesses should treat cannabis production costs and define which expenses they are permitted to deduct as COGS. The IRC advises the use of the "full absorption" method of computing COGS which takes into account both direct and indirect production costs.

Direct production costs are considered those costs which are necessary for the production of cannabis and the materials that are consumed as a part of the production process.

Per the IRC, the direct production costs that cannabis producers can deduct are the costs of:

●Raw materials and supplies (seeds, soil, clones, fertilizer)
●Expenditures for direct labor (hiring workers to clean, trim, cure, package and inventory the cannabis and the associated wages, payroll taxes, and insurance)

Examples of indirect production costs that can be deducted as COGS include:

●Repairs to production and storage facilities
●Maintenance costs for your production and storage facilities
●Utilities (water and electricity used to grow cannabis)
●Rent for your production facility
●Indirect materials and supplies (grow supplies and packaging)
●Indirect labor (supervisory wages)
●Costs of quality control and inspection

These indirect production costs are only deductible if they can be related to the production of cannabis. In addition, if the cannabis production business prepares financial statements that are in accordance with GAAP, some additional expenses can be deducted, which are outlined here.

Californians Helping to Alleviate Medical Problems (CHAMP)

In a 2007 case, Caregiving Californians Helping to Alleviate Med. Problems, Inc. v. C.I.R., 128 T.C. 173, the Tax Court determined that CHAMP could take business deductions for the patient care portions of the non-profit’s medical marijuana dispensary operations. CHAMP was a caregiving program that was designed to provide members with medical cannabis in according with the laws of the state of California. The organization also provided one-on-one counseling, medical supplies, yoga instruction, healthy meals, and Internet access.

As a not-for-profit entity per California law, the Tax Court agreed that CHAMP was actually two separate businesses. The ruling found that the CHAMP's primary business was actually caregiving services, which would permit the deduction of business expenses that were otherwise precluded by §280E.

The CHAMP case made it possible for cannabis businesses to operate multiple businesses under one roof. As a result, it is a good idea to add additional services onto your cannabis business so that you can take advantage of as many of these COGS deductions as possible.

Add patient services, such as counseling or advocacy, and make sure that all other businesses have real purposes and separate financial records to back up their operations. By expanding your business to include non-cannabis related services, you can improve your profits and increase the number of COGS deductions that your business can claim.

Lowering the Risk of an IRS Audit for your Marijuana Business

7/29/2016

The Internal Revenue Service is after cannabis companies in Colorado, sparking uncertainty and unease among cannabis businesses. The newest audits are focusing on Form 8300, which is the form used to report cash transactions of $10,000 or more. The IRS is investigating large cash transactions which have been processed by these businesses for evidence of money laundering and under-reporting of business income. While some marijuana-related businesses in Colorado have already been able to settle their Form 8300 audits, other business owners are dealing with audits from the IRS regarding Section 280E. This article is intended to help marijuana related business mitigate their potential exposure to an IRS audit.

For cannabis companies, an IRS audit doesn't only come along with the risk of having to pay additional tax liabilities, the businesses may also be hit with fraud or other criminal charges because cannabis is still considered to be an illegal drug under federal statutes. Generally, businesses that earn $200,000 can expect to be audited at a higher rate than businesses that earn less than this amount. Underreporting your income is one of the top IRS red flags and with cannabis-related businesses dealing in cash, it is fairly easy for these businesses to come under the scrutiny of the IRS.

Until the law changes, every cannabis company is at a substantially higher risk of being audited by the IRS than other types of business. As a result, it is extremely important for your business to follow these best practices so that you can reduce your chances of being audited.

1. Maintain Careful Records and Copies. The more your business makes, the higher the chances are of an audit. This is because you are likely to be required to file Form 8300 for multiple transactions that were conducted. In addition, if your business takes large deductions for cost of goods sold (COGS), the IRS may wish to examine your deductions more closely. Make sure that you maintain copies of all filed tax forms and receipts for all of the items that you claimed as a part of your COGS deductions.

2. Make Sure to File on Time. While it may seem obvious that you should file your returns on time, it can be difficult to keep up with the forms and due dates for marijuana-related businesses since the rules seem to change each year. Having a qualified tax professional prepare your taxes can help you keep on top of the legal requirements for your business.

Here are the annual deadlines that companies should be aware of:

● Corporation income tax returns (Forms 1120 and 1120-S) are due by March 15th for S corporations and April 17, 2017 for C corporations.
● Partnership tax returns (Form 1065) are due by March 15, 2017.

3.Comply With All State Laws. Make sure that you have properly disclosed all of the activities of your business and any related party interest to your lawyer and CPA to ensure that your business is in compliance with state law. To find out more about the laws that apply to cannabis-related businesses in each state, go to:

● Alaska: Alcohol & Marijuana Control Office
● Washington: Washington State Liquor and Cannabis Board
● Oregon: Oregon Department of Revenue Marijuana Tax Program
● Colorado: Colorado Department of Revenue: Marijuana Taxes
● California: California Board of Equalization: Marijuana

Being in violation of state law puts your business at a much greater risk of audit because the federal government's current policy is to investigate cannabis-related businesses that violate both federal and state laws.

No matter how many precautions you take, there is absolutely no guarantee that your business won't be audited by the IRS. However, using the tips above can lessen your chances but you should still make sure to maintain, thorough, well-organized records just in case. If you have any additional questions, please feel free to contact us.