Cannabis has long been celebrated by people utilizing the healing properties of the plant to ease pain, reduce inflammation, and calm anxiety. After many years of scientific research, cannabis has finally started to become decriminalized and legalized across the US. It’s been a long time coming, but now that access to cannabis is easier than ever, everyone is rushing to become part of the retail industry. Like with any industry, there are certain rules and regulations that need to be followed when conducting business, making transactions, bookkeeping, and paying taxes.
To fill this need in the industry, you can now find and hire qualified accountants from a cannabis accounting firm who understand the ins and outs of the retail cannabis industry. We’ll take a look at some of the rules and regulations surrounding the retail cannabis industry and how hiring a qualified accountant can keep your business legal and profitable.
Understanding Cannabis Taxes
All retail cannabis sales are subject to a number of different taxes. The first tax is the retail sales tax which refers to the local tax levied on all retail goods. This tax rate is set by the state governing bodies and varies state by state”, says cannabis retailer Kolas.com, a seller of Kiva edibles.
The only exception to this tax is if the purchaser provides a medical marijuana card. The next tax imposed on retail cannabis sales is an exclusive 15% cannabis excise tax imposed on all retail purchases of cannabis including medical marijuana purchases.
As a retailer, this tax is legally required to be paid to your distributor as well as collected on each customer purchase. Additionally, cannabis retailers are subject to higher federal tax rates anywhere between 40-80% compared to 21% for other corporations. A cannabis accounting professional can help you understand the taxes you have to pay while ensuring your business remains compliant with tax laws and codes.
Section 280E IRS Code
In addition to understanding sales tax and excise tax for cannabis sales, many retailers will become frustrated while trying to navigate filing taxes as a cannabis retailer. At the federal level, cannabis is still considered an illegal substance and IRS Tax Code 280E states that “no deduction or credit shall be allowed in running a business that consists of trafficking a controlled substance.”
This tax code exists to prevent drug dealers from benefiting from deductions or tax returns, but there are a number of loopholes cannabis retailers can utilize to reduce the amount of taxes paid at the end of each tax season. A qualified cannabis accountant can analyze and identify if any part of the process of purchasing, selling, or transporting cannabis may qualify for deductions based on what is known as Cost of Goods Sold (COGS) which may result in significantly minimizing the tax impact on your business.
Bookkeeping for Cannabis Retailers
As with any retail industry, cannabis sellers must maintain records of all of the financial affairs of the business. While computer programs and automated systems have made this much easier in recent years, it is still a time consuming task for busy cannabis retailers and errors are still commonplace which can result in devastating outcomes for the business if not addressed and handled by a qualified professional. A cannabis bookkeeper will focus on keeping organized, comprehensive financial logs as well as provide routine financial statements that can outline business growth and provide a guide for improving productivity, profitability, and oversight for your business.
Risk of Tax Audits for Cannabis Businesses
Because the cannabis industry is so highly scrutinized by the federal government and the Internal Revenue Service (IRS), cannabis retailers are at a higher risk of being audited by the IRS. A Freedom of Information Act filed with the IRS confirmed that the IRS has generated over 200 pages of information on enforcing Section 280E of the tax code. These documents act as a playbook for auditors to enforce the code and require businesses to pay exorbitant taxes for cannabis related sales. Cannabis accountants and bookkeepers received special training and certifications to ensure they maintain complete, organized financial documents in the event that your cannabis retail business receives a tax audit from the IRS.
Assistance Finding Banks and Payroll Professionals
Almost all cannabis sales are conducted solely as cash transactions because they are not legally recognized under federal law. While the cannabis industry brings in billions of dollars a year, it is often difficult for cannabis retailers to find a financial institution willing to do business with them due to fear of legal repercussions. Even though a cannabis accountant will not be able to provide these services, they will have knowledge and expertise in the industry and will have connections to third party banks and payroll companies who are willing to work with cannabis retailers. They can be an extremely helpful resource when deciding which companies are best to form a working relationship with.
