Seven states have legalized and taxed marijuana. Both the consumer and cultivator are taxed. The cannabis business is booming because of the numerous medical benefits of the marijuana that are being discovered. The states are making millions of dollars from marijuana taxation. However, the medical marijuana which is legal in 32 states is not generating a lot of income.
When the Congress passes the section 280e, it feared legal challenges. Consequently, they decided to exclude the cost of sale in the taxation even when the illegal goods were sold. According to the congress, the cost of the good sold are the direct expenses, like the cost of product and shipment expenses which are directly associated with the marijuana that is sold. However, even with the exclusion of the cost of sale by the congress, the IRS has narrowed the definition of the cost of sale for the cannabis business. The IRS does not allow for tax changes that allow the inclusion of indirect costs. Cannabis business do not use the same accounting system like the one used by other businesses to ensure that the IRS benefits.
To ensure that you maximize your tax deduction, ensure you understand how to work around the section 280e. It is essential to note that many cannabis business owners are working around the section 280e with smart business structuring. You should consider working in two separate business.
The first part of the business is the one responsible for the production and distribution of marijuana. This kind of business will file a return while following the directive of the section 280e. The other business will deal with activities that are legal under federal law. Managing the second business, selling ancillary product and offering care services are some of the activities that are done by the second business. It is vital to note that the second business will claim all the deductions. When you operate the business as two, you will save taxation compared to when you could have run it as one.
The IRS conduct thorough scrutiny at the marijuana business as they look for a reason to penalize them. Therefore you should be vigilant as the tax person while no show any mercy in prosecuting the negligent or non-complying cannabis operator. It is vital that you consult a tax expert who deals with cannabis. The expert will ensure that you do not make any mistake while you are filing the taxation.
The experts are going to help you determine the best accounting method that you ought to use. They will also assist you to understand the general rules regarding the sale of the marijuana. The expert is usually updated with the latest IRS court cases and will prevent you from paying more tax than you should.