Product development/processing tax planning and accounting are usually equally important. Producing, developing, and processing cannabis is illegal under federal law, which classifies cannabis as a controlled substance. On the state level, things are different. Some states, like Delaware, Minnesota, and North Dakota, allow the sale of medical cannabis. Other states, like Alaska, Vermont, and Washington, allow the sale of recreational cannabis. Something that both state and federal governments agree on is that cannabis production and processing should be heavily taxed and regulated.
If Cannabis Production, Development, and Processing Are Illegal on the Federal Level, Why Do You Pay Federal Taxes on Income Earned?
According to section 280E of the Internal Revenue Code, you or your product development/processing CPA cannot include ordinary, necessary, or reasonable business expenses as tax deductions as part of their product development/processing tax planning.
The IRS has given some guidance on how a marijuana business may make deductions based on the cost of goods sold. However, a product development/processing CPA should recognize that these are guidelines and cannot be cited as a precedent. There are some nuances to the law that product development/processing accountants may be able to use for businesses producing medical marijuana. Still, discretion is warranted.
You might ask, why should I pay taxes on my business if the federal government doesn’t see it as legal? The money you earn from developing and processing cannabis is income. Everyone who earns income, regardless of how they earn it, is required to pay income tax. Failure to do so could result in prosecution by the IRS for tax evasion.
Fusion CPA’s product development/processing accountants are here to help. We offer accounting and tax planning services. Our team of experts can review your product development/processing bookkeeping to help identify money-saving tax strategies tailored for the cannabis industry.
Taxation in the Cannabis Supply Chain
Each state is different, and the regulations must be separately researched. However, broadly speaking, states will tax:
California is among the most proactive states in enacting cannabis tax law. This includes the cultivation tax, which applies to all cannabis harvested in the state that enters the commercial market. Cultivators must pay this tax to manufacturers or distributors. Rates range from $1.29 cents to $9.25. Rates will vary depending on if you are selling fresh plants, flowers, or leaves.
The cannabis excise tax is currently at 15 percent. This is a tax that the retailer will collect from the customer and then pay to the distributor. They add the excise tax on at the time of sale. Colorado also has a well-developed tax structure for cannabis producers. For example, tax is placed on the retail marijuana cultivation facility. This tax goes straight to the Department of Revenue when cannabis is first sold or transferred to a retail store or a product manufacturing facility.
How a Product Development/Processing Financial Adviser Can Help Clarify Cannabis Tax Laws
Product development/processing accounting and tax planning may be complicated for entrepreneurs working in the highly regulated marijuana industry. At Fusion CPA we offer product development/processing CFO business advisory designed to clarify sometimes conflicting laws, be them local, state, or federal. Our team of experienced accountants is familiar with the ins and outs of IRC Sec. 280E and other tax codes. We have studied relevant litigation and can help you make the proper presentation on your tax returns to help support the smallest tax liability possible. It may be time to add an extra precaution to protect yourself and your growing business by getting the professional support you need. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive