If you’re running a cannabis company, you know that figuring out tax season is challenging. Tax deductions for cannabis companies are often opaque and aren’t necessarily in alignment between the state and federal governments. However, there are some expenses you can deduct and others that you might be able to write off depending on your location. Here’s a look at what to expect come tax season.
Federal Law and Marijuana
Federal law still considers marijuana and cannabis illegal controlled substances. As such, they deny tax credits or business deductions relating to those substances.
Despite the laws and challenges to finding tax deductions for cannabis companies, you still need to pay taxes on the goods you sell. If you’re running a dispensary or cannabis company in states where it’s legal to operate, you still can’t claim federal deductions like employee compensation.
However, CBD products, including CBD oils, may have some exceptions to help your journey towards a more lucrative and stable financial future. It depends on your state, the products you’re selling, their use, and if you’re working with a knowledgeable CBD accountant who can help navigate this bumpy legal landscape.
What Is the 280E Tax Code?
The 280E Tax Code prevents businesses handling Schedule I or II restricted substances from deducting business expenses. Currently, some tax deductions for cannabis companies are permitted for the cost of the production of goods, including cannabis oil. Your business taxes and expenses could prove more complicated if you operate a dispensary that sells marijuana and products like CBD. You may only be able to deduct the costs specific to your cannabis products.
Unfortunately, the 280E tax code is a financial drain on your business. Unlike most companies that take federal tax exemption, cannabis businesses pay taxes on gross income. You could even end up paying tax on more than what your business earns, making it more critical than ever to take as many legal deductions as possible.
What States Allow Tax Deductions for Cannabis Companies?
All but a few states have legalized marijuana use in some form, like recreational medicinal use. But there’s a difference between legal use and running a business that can take tax deductions. Fortunately, more states are expanding local deduction of cannabis and marijuana business expenses. It’s probably no surprise that Colorado was the first to allow deductions starting in 2014. Here’s a round-up of other states currently allowing such deductions at a local level:
- California
- Hawaii
- Louisiana
- Maine
- Michigan
- Minnesota
- Montana
- New Mexico
- Oregon
- Vermont
Each state allows different deductions or may have expanded legislature and consideration on the issue. Speak to a skilled cannabis CPA to ensure you maximize any state deductions to the fullest.
What Deductions Can Cannabis Companies Take?
On the state level, there are some deductions you can take to help your CBD company get up and running. Depending on the nature of your business and products, you may also be able to look into federal deductions that help keep your CBD business as profitable as possible. Here are a few of the tax deductions for cannabis companies to discuss with your accountant:
- Labor
- Equipment and packaging
- Insurance
- Professional fees and licenses
- The invoice price for cannabis
- Transportation relating to the cost of travel to purchase and legal shipping costs
- Utilities
Keep in mind current regulations change, and the IRS is still trying to figure out how to handle marijuana and cannabis companies. It’s always essential to work with a CBD accountant who can help walk through your financial situation, from deductions to payroll.
If you are starting a CBD oil business or have already established a business and need help navigating the sometimes murky financial waters of your industry, contact us today. We can help your brick-and-mortar location or your online location, or both. However you sell your products, your greatest asset is a knowledgeable, professional accountant. Reach out to us today to schedule your free consultation!