Navigating the Changing Landscape of Cannabis and Hemp
The cannabis and industrial hemp/low THC industry are highly regulated by federal and state laws. While hemp is no longer a “Schedule Controlled Substance”, the emerging industry faces ongoing scrutiny. Dozens of states and D.C. have legalized the use of medical cannabis; however, federal law still considers it an illegal activity.
The divergence between federal and state laws has caused considerable uncertainty for all Cannabis-related businesses. Fundamental tax issues such as “Cost of Goods Sold” (COGS) deductions, one of the most significant methods of reducing a business’ taxable income, must be considered in according to the varying state laws. It is important to seek advice from professionals knowledgeable in this industry to ensure proper compliance, tax minimization and risk management.
Keeping up with an Evolving Industry
The industry is seeing explosive growth and change. It is estimated that total sales of CBD products in the U.S. exceeded $624 million through retail channels and $16 million in CBD’s sold through pharmacies. A new market, CBD sales are in addition to the $1.2 billion in low-TCH/CBD products sold in dispensaries along with $8.6 billion in flower and other THC-containing products.
As growers, retailers, manufacturers, investors or ancillary business owners, you should pay close attention to compliance with federal and state laws and the implications for your balance sheet.
Daszkal Bolton’s multi-disciplinary team of tax, audit and advisory professionals will help you monitor the rapidly changing industry to ensure compliance, strengthen financial safeguards to protect your business and optimize your tax position to enhance profits.
Cannabis Industry Tax, Accounting and Advisory Services:
Bookkeeping of transactions: The cannabis & hemp industry operates mostly with liquid cash primarily due to limited access to traditional banking services. Detailed record keeping is essential to this nascent industry and strong vendor relationships will help you lower the burden of managing and securing cash in house. The Daszkal Bolton team knows these issues and helps you seamlessly manage your finances. We will provide you with financial data, analysis and professional knowhow to manage cash flow, monitor expenses, and think strategically.
- Federal Income Tax: Cannabis is still a Schedule I controlled substance and is considered illegal. Despite that, the IRS requires businesses in the industry to report all revenues and disallows all deductions, other than “Cost of Goods Sold” (COGS).
COGS can be complicated and burdensome but can yield significant cost savings when handled properly. It is important to be familiar with IRC §280E as it outlines the criteria for allowable expenses.
Business owners must:
- retain detailed and thorough records;
- disclose all information on tax returns and;
- recognize the costs incurred to develop the goods.
To complicate things further, the IRS has differing allowances for industry segments. For example, marijuana resellers have limited COGS whereas producers have more liberal COGS allowances. While Hemp is not a Scheduled Controlled Substance and not subject to 280E, federal tax law requires that all documents be retained to be compliant.
The Daszkal Bolton team works with business leaders in the cannabis industry to identify allowable expenses to help you comply with federal law and maximize your income.
- State Income Tax: Proper computation of state income tax by taking into consideration those deductions allowed by each State. It is essential to properly disclose all business activities to ensure that your business follows state law. Being in violation of state law puts your business at greater likelihood of audit as the federal government’s policy has been to investigate cannabis-related businesses that violate both federal and state laws.
- Sales Tax: Recreational states of cannabis and hemp are subject to varying state and local sales tax compliance. States can shut down operations if sales taxes were missed. The Daszkal Bolton team understands sales tax requirements and can ensure compliance in the jurisdictions you are operating.
- IRS Audit: The cannabis and hemp industry have a high IRS audit risk Your business should follow best practices relating to record keeping, timeliness, and compliance with aforementioned tax and regulatory requirements to minimize your chances of being audited. Daszkal Bolton’s team will facilitate prevention strategies and guide you through any type of interaction with the IRS.
Applying and maintaining a state license has strict requirements for any level of assurance on financial statements. It is critical for your company to regularly review and optimize internal accounting processes and procedures especially those unique to the industry such as cash processing and management to provide the level of assurance necessary to acquire the license.
To learn more about cannabis advisory and accounting services at Daszkal Bolton, simply complete our contact form, or call (561) 367-1040.
Business Advisory Services
- Standard Operation Procedure Engagements: The cannabis and hemp industry have unique needs relating to operations, inventory controls and financial reporting. The Daszkal Bolton team assists your business by documenting the operational process and the determination of the all-important “Cost of Goods Sold”. Standard operation reviews reduce the risk of IRS penalties and improve the following:
- Cash management
- Internal controls
- Inventory control and costing
- Cash processing procedures
- Accounting and inventory software implementation
- Mergers & Acquisitions
Whether buying, selling or investing, our professionals can properly guide you by determining operating cash flow and potential contingent liabilities and/or assets. We provide services and information for you to use for negotiation and strategic purposes including:
- Due diligence
- Business valuation
- Buy-side and sell representation
- Strategic tax planning
- Financial Statements
- Audit Readiness
- Business Planning
As businesses grow and prosper and the regulatory framework changes, Daszkal Bolton guides decision making relating to business operations, strategic investments, regulation, tax and licensure.
- Financial Statements
- Strategic tax planning
- Future Projections
- Investment planning
- Tax Consulting
- Choice of Entity
- Preparation of Form 8300
- Sales Use and Excise Taxes