The weather is cold, celebrations are planned and the spirit of giving is alive and well. And that means it’s time for a gift that keeps on giving — tax tips for the new year.
We know that no one likes to talk about taxes, especially right at the beginning of a new year, but we also know the benefits of saving time, money and frustration by having the tools to get the job done right the first time. Whether your cannabis company is a small cultivation business or a massive, vertically integrated enterprise, these tips will help you grow your business.
Maintain Good Documentation
Talk to any good CPA and they will tell you that documentation is a key aspect of maintaining good financials. Given the all-cash nature of the cannabis industry, it is even more imperative for businesses to maintain an accurate cash log and retain all the corresponding receipts. This ensures financial transparency and accuracy if your company is ever audited.
Some examples of the documentation you need to keep are:
– Purchase orders;
– Credit card statements; and
– Bank statements and cancelled checks (if you’re lucky enough to have a bank account).
This information should be organized by month/year and expense type to allow for easy accessibility whenever it is needed. While hard-copy documentation should be stored according to company policy, a digital backup is also highly recommended. To maintain good record-keeping, tax documentation should be kept up to seven years, and any major financial records or tax returns should be kept permanently.
Talk to Your Financial Adviser
While good documentation is key, it is also important to keep your financial adviser informed of any big changes in your company like large capital purchases, changes in operations or ownership structure and any unusual transactions that may have occurred throughout the year.
By keeping your CPA in the loop, they will be better able to advise you while performing tax or business planning. Asking your CPA to provide advice without the relevant information they need is like asking your doctor to prescribe treatment without knowing all your symptoms. As the end of the fiscal year approaches, having a discussion with your CPA is essential so your company goes into the next year with an updated plan.
Review Your Chart of Accounts
Creating a chart of accounts for your cannabis business may seem like the game Jenga. If you take a block away from one section of your business, you have to add it back someplace else. Factor in the restrictions imposed by Internal Revenue Code 280E, which limit business deductions to cost of goods sold (COGS), and managing your tax liabilities can feel like a nightmare.
COGS is one of the key factors to reducing your taxable income. As such, your chart of accounts should include both direct and indirect costs. Key focus areas are labor, inventory and production costs.
For dispensaries, only the invoice price of purchased cannabis, less any trade or other discounts, as well as the transportation and other costs necessary to gain possession of the inventory, can be considered as COGS.
For cultivators and manufacturers, there are significantly more opportunities to claim items as COGS. All labor associated with cultivating, trimming, harvesting and processing cannabis are direct costs of production and are fully deductible. Any time spent on marketing and sales activities are considered “trafficking,” per 280E, and will be a disallowed labor expense. In addition to labor, direct expenses such as water, nutrients, soil, packing and processing materials, electricity and rents may be considered COGS.
Other costs that may be considered as COGS include repair expenses, maintenance, indirect materials and supplies, tools and equipment not capitalized and costs of quality control and inspection, but only if these costs are incident to and necessary to produce cannabis. If these expenses are not related to cannabis production, then they are nondeductible.
Since COGS is the only allowable deduction, it is imperative to understand what costs are included in it, so you can determine gross margins and taxable income.
File Applicable Information Forms
There are several information returns that are due at the beginning of each calendar to the IRS and applicable recipients. The following list provides an overview of the most common forms, applicable due dates and a brief overview of the filing requirements that cannabis businesses should be aware of. Please consult your CPA or tax professional for a comprehensive list applicable to your business.
Form 940: Employer’s Annual Federal Unemployment Tax Return (FUTA) and Form 941: Employer’s Quarterly Federal Tax Return
Due Dates: Jan. 31 for both forms; however, if you deposited all your FUTA tax when it was due, you may file Form 940 by Feb. 12, 2018.
Extension Available? No.
– Electronic funds transfers (EFT) must be used to make all federal tax deposits. Generally, an EFT is made using the Electronic Federal Tax Payment System (EFTPS).
– If you outsource any of your payroll and related tax duties to a third-party payer, such as a payroll service provider or reporting agent, you’re still responsible to ensure that tax returns are filed, and deposits and payments are made.
– The taxpayer remains responsible if the third party fails to perform any required action.
Form W2: Wage & Tax Statement
Due Dates: Copy A of Forms W-2 and W-3 by mail or electronically with the Social Security Administration by Jan. 31; Copy B, C and 2 to employees during 2017 by Jan. 31.
Extension Available? Yes; request a 30-day extension for Copy A filing on Form 8809: Application for Extension of Time to File Information Returns.
– Must be completed for each employee that received wages or tips.
– Withholding is determined by reviewing the Form W4: Employee’s Withholding Allowance Certificate received from the employee.
– If you file 250 or more W-2s, you must file electronically.
– Extensions are only allowed for employers meeting certain criteria.
Form 1099-MISC: Miscellaneous Income
Due Dates: Copy A by mail to the IRS no later than Feb. 28 or by March 31 if you file electronically;
Copy B to recipient by Jan. 31.
Extension Available? Yes, request a 30-day extension for Copy A filing on Form 8809: Application for Extension of Time to File Information Returns.
– Must be completed for each person to whom you have paid for services that meet or exceed $600 during a tax year.
– Payments to a corporation (including an LLC that is treated as a C or S Corporation for tax purposes) are generally not required.
– Tax status of the payee is determined by reviewing Form W9: Request for Taxpayer Identification Number and Certification received from the payee.
Form 8300: Report of Cash Payments Over $10,000 Received in a Trade or Business
Due Date: A written statement to each person whose name was required on a Form 8300 for the year by Jan. 31 of the year following the transaction.
Extension Available? No.
– Must be submitted to the IRS whenever a cash transaction of $10,000 or more has occurred between two persons. NOTE: This form must be filed within 15 days of receipt of payment of $10,000 or more for a transaction.
– The transaction can be a single transaction, or it can be two or more related transactions with the same payor (or their agents) in a 24-hour period, including transactions where structured payments are made in cash over a greater period within the year.
– You can submit the form electronically for free using the Bank Secrecy Act Electronic Filing System on the FinCEN website or by mail. You must also retain copies of every Form 8300 you have filed for five years.
Trust Your Financial Health to Professionals that Specialize in the cannabis Industry
Just like not all doctors perform surgery, not every CPA is familiar with the unique legal, political and cultural challenges cannabis businesses face. Sure, a regular CPA may be familiar with the issues your business faces as part of this young, evolving industry, but have they devoted the time and resources to fully understand the complex cannabis industry? Probably not.
From regulations that vary in each state to the stringent federal rules for taxation, a cannabis-focused CPA is an important service provider who stays abreast of important changes in the rapidly evolving cannabis landscape. They understand the complicated role that IRC 280E plays in your business’ financial picture and how vital it is to stay informed about any regulatory changes that can affect your business, so they can help you stay compliant.
Julian Tolliver is a certified public accountant who serves as K&H Consulting’s controller. He brings more than nine years of private and public accounting experience to the cannabis industry. To learn more about K&H Consulting and how it can help cannabis businesses grow, visit its website, www.khconsultingnv.com.