9 Tax-Time Tips for Cultivators

Features - Business

December 5, 2017

© marcnorman | iStockphoto

The cannabis industry has many thorns in its side, not the least of which is taxation. Taxes can be frustrating and daunting. Most cultivators/owners are not CPAs, and the complexities brought about by IRS code 280E make matters worse. Even CPAs familiar with the ins and outs of this complex industry can be challenged by a cultivator’s tax returns. But you can take steps to help yourself and your business prepare for tax season.

Here are 9 tips to get you started.

1. Hire Quality Professionals Familiar With the Cannabis Industry and Its Unique Characteristics, Including Your:

  • Attorney
  • Accountant
  • Payroll service
  • Other consultants, as needed.

2. Address Your Entity Structure Up Front

Most entities start as LLCs due to the flexibility it allows. LLCs can elect to be taxed as corporations or S corporations. Consult your professionals to determine what best fits your situation, ownership structure and unique operating conditions.

3. Deal with Your Employees Properly

People working for you on a regular basis (even part-time) are employees, not independent contractors. Hire a payroll service to deal with all the tedious elements of payroll, including social security taxes, Medicare, federal tax withholding, state and federal unemployment taxes, workers’ compensation, and garnishments.

If you choose to manage this internally, use a comprehensive software package to ensure it’s all handled properly. Be sure to have clear job descriptions for your employees, and track their job functions. It’s important to be able to categorize wages into inventory-related activities and non-inventory related activities.

4. Keep Great Records

Ensure you’re gathering reportable information in these three categories:

  • Accounting. Keep your receipts, bank statements, invoices, etc., and make sure you provide them to your bookkeeper on a regular basis.
  • Payroll. Keep timecards, employment verification and copies of all payroll tax returns.
  • Production. It’s a must to keep diligent production records. This is necessary to assist you in knowing which methodologies are working, and where modifications need to be made to produce better results-not just production-wise, but cost-wise. It’s also necessary for year-end to assist your accountant in valuing any inventory (especially growing plants). At year-end, your accountant will typically want to know:
    • Total volume of finished goods produced for the year;
    • Number of plants growing and where they each are in the growth cycle;
    • Typical growth cycle; and
    • Average plant yield.
Keeping records of all expenses will make things easier come tax season. Be sure to collect reportable information on accounting, payroll and production.
Wutwhanfoto | iStockphoto

5. Banking

If you can get a bank account for your cannabis entity, do so, and use it for everything. This may seem obvious, but many cannabis business owners shy away from the additional fees that banks often want to charge industry businesses. Having a bank will dramatically simplify your financial life and is well worth the fees.

6. Cash

There is a likelihood that many of your transactions will be in cash, so it’s imperative to keep comprehensive cash logs to show where the money came from and/or where it went.

7. Be Informed on Industry Rules and Regulations

Stay compliant with the various state and local regulations. Violations typically come with fines or business closure, so the stakes are high, especially if there have been prior violations.

8. Be Aware of Which Costs are Deductible and Which Are Not, and Manage Them Appropriately

Remember that cannabis entities are subject to Internal Revenue Code Section 280E, which forbids deductions other than cost of goods sold (COGS). Anything that becomes part of your product will offset income as COGS. Costs that aren’t part of the product are not deductible. These include selling expenses, delivery, administrative overhead and advertising, to name a few.

9. Taxes, Taxes, Taxes—Understand Them and Stay Current

These include:

  • Federal Income Tax
  • State Income Tax
  • Marijuana Excise Tax
  • Sales Tax
  • Property Tax
  • Personal Property Tax
  • Payroll Tax

Keep a due-date calendar for all tax types so you know which payments are due, and when.

Dean Guske, CPA has over 30 years’ experience in taxation, accounting and business consulting. He serves several hundred clients in the cannabis industry.