Tax filing is a stressful time for all American business owners, most notably those in the cannabis industry. Cannabis businesses face strict tax codes that allow for few deductions and harsh liabilities. There are loopholes that can help taxpayers reduce their burden but must be done legally to avoid penalties. These loopholes must be implemented during the taxable year to reap the beneficial deductions.

It is important for cannabis businesses to collect necessary documentation before meeting with a tax professional. This includes all expense-related paperwork, records, licensing, etc. Proper preparation will ensure that your tax professional has all of the information they will need to find deductions and file your taxes accurately.

The following informational guide was created to help business owners navigate the confusing process of cannabis tax filing. This will include information on how to reduce your tax liability, which expenses to track throughout the year, and which documents to bring when it is time to file taxes.

Cannabis Industry’s Strict Guidelines

Cannabis dispensary guidelines

The government is notorious for placing harsh and unjust taxes on those who are part of the cannabis industry. This is due to outdated laws that still consider marijuana an illegal drug on a federal level.

Because of these laws, the majority of cannabis dispensaries are only allowed to claim expenses that are associated with the cost of goods and services. These are known as direct expenses. It is critical to the life of your business that you ensure that all purchases that are claimed are valid expenditures.

Typically, the cost of goods sold accounts for the cost of labor and materials, including inventory. Dispensaries can also claim transportation costs.

Those who are in charge of a cannabis cultivation business can claim several additional deductions, including the costs associated with caring for their plants and additional production expenses.

Keep Accurate Records

dispensary tax regulations

The most important part of preparing for tax season is to keep records throughout the year. This is critical for the success of your business by providing the proof required for your expenses.

These records are also an important tool that your tax professional can review to find potential deductions in your tax liability. If you do not have an account it may be wise to invest in accounting software to make this easier.

Intelligent Financial Solutions 

dispensary financial solutions

Organization is critical to running a successful cannabis operation. Business owners should be prepared for audits because they are often targeted by the IRS. These records can save your business from suffering from hefty fines.

Cannabis businesses are targeted because they typically operate using cash rather than electronic payments. There are companies that are dedicated to providing cannabis businesses with the technology needed to process electronic payments. This is a potentially wise investment that can generate sales and assist in record keeping.

Set Aside Money

how to prepare for cannabis related tax

You should also prepare by determining your projected amount of tax liability. Put aside money every month in a savings account every month in preparation for tax season. It is better to overprepare than to not have the money when taxes are due.

Find Ways to Reduce Your Tax Burden

There are several loopholes that cannabis businesses are using to reduce their tax liability. Two of the main tactics include business division and business classification change.

Business Division

Many of those in the cannabis industry are choosing to divide their business into two separate entities. They operate one business for all of their cannabis inventory and operations. They then create a separate business for other costs, including merchandise.

This allows use of the non-cannabis business to claim deductions that are given to those outside of the cannabis industry. This business can also be used to purchase property and other large tax ventures.

Business Classification Change

The majority of marijuana dispensaries are classified as resellers, meaning that they can only deduct the cost of goods sold. Examine your business license to determine if you are allowed to manufacture with your current license. If not, find out how to become licensed to do so.

Cannabis manufacturers are allowed to claim many other deductions, including indirect costs. You do not have to be major corporation to classify your business as a manufacturer. Simple in-house extraction, repackaging, or making edibles is enough for your business to become classified as a cannabis manufacturer.

These are things that would need to be implemented before the end of the filing year to take effect. They do require additional financial expenses and/or increased effort but are well worth the time and money invested.

Important Tax Reminders

Do not forget that you are required to send tax documents to all employees and contractors by January 31st.

When you visit your tax professional you should have all documentation and records that you have collected throughout the year. This paperwork should include:

  •       Tax return documentation for the previous two filing years.
  •       Records of all sales, excise, and taxes.
  •       Income Statements
  •       Balance Sheets

Bring all records of any business-related expenses. These will help your professional find the maximum deductions and save you money.

Contact a Cannabis Tax Professional

Cannabis tax regulation

Operating a cannabis dispensary is often confusing and stressful when assessing financial liabilities. It is important to hire a tax professional who is educated and experienced in managing the tax filing for cannabis businesses.

A professional who is experienced in the cannabis industry will be educated on related tax codes and regulations. These tax professionals can help cannabis businesses legally reduce their tax burden, by ensuring the correct tax forms are utilized, and all deductions are claimed.

Reach Out to Paybotic Today

A Cannabis Tax Preparation Guide for Business Owners

Paybotic is the leader in providing advanced financial solutions specifically designed for cannabis businesses. Reach out to Paybotic today for more information about their intelligent technology and services that can help make your cannabis business operation successful.


Post date: 9/3/2021
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