Tax season can be especially stressful for marijuana dispensaries who are constantly trying to avoid an audit. Filing cannabis taxes requires extensive knowledge of the tax laws, meticulous bookkeeping and a dispensary POS system capable of tracking sales/expenses.
In this article, we’ll suggest a few ways marijuana dispensaries can navigate tax season to protect their business and avoid overpaying the IRS.
Tax Statute 280E
Any marijuana dispensary that has experience filing cannabis taxes will be very familiar with U.S. Code Section 280E. This statute mandates that any business engaging in the trafficking of a Schedule I or II controlled substance, such as marijuana, is barred from taking advantage of tax deductions.
This basically boils down to cannabis retailers being responsible for paying taxes on all revenue without the ability to write off any business expenses. Paying taxes on all revenue without any deductions can be crippling for marijuana dispensaries if they are unaware of how to structure their business.
Cost of Goods Sold
There is one exception to 280E that allows marijuana dispensaries to take deductions on the cost of goods sold, even if the goods are technically illegal under federal law. The cost of goods sold is essentially inventory expenses including paying for products, shipping costs, and any other directly related expenses pertaining to inventory.
Marijuana dispensaries can actually write off man hours associated with inventory onboarding and management. It is extremely important that employees who work directly with inventory control track and document their activity so that it can be used as a deduction under the 280E exemption. These type of records will be instrumental when submitting employee-related expenses for tax deductions.
Separating Cannabis and Non-Cannabis
Marijuana dispensaries that sell non-cannabis accessories used to be able to classify them differently under the same business but this is no longer the case. Now it is smarter to setup two different businesses, one that exclusively sells cannabis products, and the other that sells non-cannabis accessories.
While you’re cannabis business may only be able to write off cost of goods, your non-cannabis business can take advantage of all the tax breaks afforded to regular businesses. This will actually end up costing businesses less in the long run and it could potentially add more value to your company.
Filing Cannabis Taxes
Filing cannabis taxes is definitely tricky and attempting to do them yourself or even with an everyday accountant could put your dispensary at risk. Find a tax account who specializes in cannabis tax law so that you never have to worry about the IRS auditing your business.
It is very important to keep accurate records for tax season, and having those readily available will make tax season less daunting. Marijuana dispensaries that use cannabis specific POS software can often times export all the essential documentation that will easily upload into Quickbooks. IndicaOnline always tracks your sales, inventory, and staff activity so that marijuana retailers can always be prepared when filing cannabis taxes.