Running a cannabis business can be challenging and stressful. There are complex regulations and compliance guidelines to follow; a lack of banking services; security concerns; and vendor relationships and customer needs to service on a daily basis. A cannabis tax accounting system may be one of the last things on their mind.
However, when tax season arrives, many business owners find themselves scrambling to sort through their expenses and track their pertinent tax information. Even if you use an accountant to file your taxes, it can be difficult to know what to give your accountant to maximize available tax deductions.
Follow these guidelines to set up an organisations system for tracking your tax information and alleviate some of the stress associated with running a cannabis business.
Tip 1: Understand everything there is to know about cogs and 280e.
280e is a federal regulation that affects what cannabis businesses can deduct from their taxes. To summarize, because cannabis remains a schedule 1 substance at the federal level, state-licensed and legal cannabis businesses cannot claim standard business deductions such as payroll, marketing expenses, or rent. This is obviously a significant disadvantage for cannabis industry operators.
But that doesn’t mean you can’t deduct anything from your business expenses. Gross revenue can be reduced by deducting the “cost of goods sold” (cogs). This includes packaging, labelling, and other marketing costs associated with cannabis sales. More information about what can be deducted under cogs can be found in some of our previous posts:
• Overview of marijuana business cost of goods sold (“cogs”)
• Medical marijuana companies’ cost of goods sold adjustments
Tip #2: Establish your accounting system
Your accounting system should, at the very least, include the following components.
• A chart illustrating how your various accounts are organized;
• A determination of shared expense allocations;
• The process you and your employees will use for ongoing and timely accounting; and
• How accounting transactions relate to one another and how they should be recorded.
A sample chart of accounts is a list of all the accounts that your cannabis company owns. The chart displays the account type and balance in the order in which they appear on your cannabis company’s financial statements.
Tip 3: Use an accounting system to keep track of everything
Even if you can’t deduct everything from your taxes, you should keep track of everything. An accountant or a little research can help you distinguish between cogs or “selling, general, and administrative (sg&a) expenses,” which are not deductible under the 280e, and those that are.
This is the point at which your bookkeeping becomes mission-critical. Each cost, as outlined above, must be detailed in your accounting system with proper tracking and allocation.
Create best practices for bookkeeping
Keeping track of your expenses becomes second nature once you’ve established the processes. Check that you have a system in place for recording transactions and reconciling cash, reviewing and maintaining lease schedules for equipment and other property, and maintaining an audit trail with all documentation for purchases made throughout the year. You should also plan on performing a 280e compliance audit at least once a quarter!