It is that time of year, everyone is hustling and bustling. People are checking last-minute items off of their lists. You might think we are talking about the holidays- but we are talking about the end of the year and all that tax prep that’s put off all year. Owning a business in the cannabis industry provides challenges but the Redbud Advisors team is helping cannabis business owners with expert advice on preparing for tax season.
If you have not followed along with our Tax Tip Tuesdays on Instagram, caught us on TikTok, or read any of our other blogs don’t worry, we will bring you the valuable information you need here and now.
If you have procrastinated all year about tax prep- yes this is done throughout the year and not just when you file, we have a few gems to help you on your journey to being tax compliant and to complete your taxes by the deadline Tuesday, April 18, 2023.
We want to be clear- even though cannabis is classified as a Schedule I substance, making it federally illegal, you will still need to complete a federal tax return. Your business entity structure will dictate how you file this return. A few common examples of business entities are an LLC, S-Corp, C-Corp, or Sole Proprietor.
Additionally, you will need to file a state tax return as well as any local taxes applicable.
Below is a list of typical items needed to complete your business tax return. These items are a starting point but will guide you on your way to being compliant and hopefully avoiding any IRS audits.
Open Communication with Your Accountant
The Redbud Advisors team personally knows how valuable it is to have a transparent client-accountant relationship.
If you have not completed proper bookkeeping all year and you haven’t provided your accountant with the necessary documents throughout the year- it is time to give your accountant a call.
Ask your accountant what you need to provide to them so you can get a running list of missing items to get together. Ask any follow-up questions you might have about how to obtain the information needed, specific tax code questions, allocation of the cost of goods sold, etc.
If you do not have an accountant the Redbud Advisors team is accepting new clients and are happy to help with all your cannabis business needs.
The Past is the Past…..
Actually, it isn’t. Typically you will need to have your prior year's return available for filing or even the last two years worth of tax returns.
This includes sales tax, excise tax, and any local applicable tax returns.
If you have not been in business for two years don’t worry, provide all applicable information you have based on the length of time you have been in business.
As with any tax return filing, you will have to have your financial statements ready.
This should include a balance sheet of all accounts, gross receipts, banking statements, cash logs, and any other applicable income. You will want to be sure all income is accounted for when giving your accountant this information.
This will ensure all aspects of your income will be allocated correctly, potentially saving you money.
Cost of Goods Sold
Speaking of saving you money- the only way a cannabis business can deduct expenses is through the cost of goods sold because of IRC 280E.
To maximize deductions you want to make sure your accountant has all the information and is allocating expenses appropriately and regularly. This is why we work with clients on a monthly basis, only! For instance, packaging can be allocated to the cost of goods sold. For producers, utilities, rent, and maintenance can be allocated for COGS.
Make sure your accountant has all the information about your business so you are maximizing your deductions where you can. Always ask questions and do your own research too. At the end of the day, no one knows your business better than you do.
Even though you will not be able to attribute all of your business expenses to COGS it is still imperative you are providing them to your accountant. A cannabis tax expert might be able to see something you don’t and save you some money.
Even more so you will need your expenses to complete your return.
A few examples your accountant will need can include utilities, rent, supplies, marketing, wages paid to employees, and benefits expenses. Your accountant will be more specific with their needs based on your business.
The big takeaway here is rushing to get tax return information together leaves room for error. Tax planning is something business owners need to do year-round. But if you have found yourself unprepared at the end of December- talk with your accountant, and get your income information, expenses information, COGS, and past tax information together.
Implementing processes and procedures to complete an end-of-month checklist will help keep you from rushing around at the last minute, give you a better idea of the health of your business, and help you make educated decisions in real-time. Doing this will also give your accountant less of a headache.
Bookkeeping is your best friend- if you don’t want to do it, hire someone to do it for you. We recommend someone who specializes in the cannabis
If you want more specific information for your business don’t hesitate to reach out to the Redbud Advisors team at 866-830-5144.