Due to the IRS code section 280E, which disallows all regular and necessary business expenses other than the cost of medicine sold, taxation of cannabusinesses is tricky and not a do-it-yourself project. What makes it worse is some lawyers and accounting professionals give you bad advice: don't file taxes as it is an admission of guilt, you have to report the income but no deductions, or hide the income and deductions as part of another business. These are all bad ideas and can cause problems with the IRS if your return is selected for audit.
Most people have heard of Al Capone, the prohibition-era gangster who ran a criminal organization that caused all kinds of major felony mayhem. What some forget is Al was never convicted of the murders or other major crimes he should have served prison time for; they got him for tax evasion for not paying taxes on his illegal profits. That's why he is our poster boy; the same IRS code that imposes 280E says that you have to report all income, foreign or domestic, legal and illegal.
The IRS wants to get paid, not call in raids; none of our cannabusiness clients have been arrested because they filed taxes; in fact, filing taxes in our digital economy has helped many of our clients find investors, make major purchases like cars and homes on their good credit and the income they report on their tax return or can show proof of income to whomever they need to see this information.
Each segment of the cannabis industry has specific requirements and methods for properly filing taxes without paying the government all their profits:
Retail stores have the most difficult returns, as in many states, they do not produce all of their products for resale and have very little production expenses. So when the IRS denies their ordinary and regular business expenses, such as rents, payroll, utilities, etc..., their taxable income goes way up and often can eat up all of the net profit of the operation. Based on our experience working on audits of dispensaries where we didn't do the original return, but were retained to help with the IRS on the audit, we have figured out the means and methods for all our dispensary clients to keep more of their profits and avoid a major tax bill.
Caregivers have the best situation for taxes as they actually produce a final product from what they purchase, build and grow. This means all the production expenses, such as utilities, supplies, equipment, office supplies and services are tax deductible under the law. On the surface, it looks like an easy filing, however, there are several nuances that need to be addressed in order to file a proper, legal tax return. We have helped numerous caregivers get right with taxes and can help you whether this is your primary business, a side job or if your spouse/partner works outside of the medical marijuana industry.
Like caregivers, processors can also deduct all reasonable production expenses that lead to their final product. Whether it is oils, wax or concentrates, we are expert at understanding these production processes and can make sure you get all the deductions you are entitled to in order to keep your tax bill reasonable and correct as the laws require.
Sadly, because medical marijuana is incorrectly scheduled as a Schedule 1 drug, it cannot be prescribed legally at the federal level. This means patients cannot deduct the cost of their medicine as a medical expense, if they itemize their deductions.