Cannabis licenses in Illinois will be available in 2 waves. In the first wave in mid-2020, the state would award licenses for up to 75 stores, 40 processors and 40 craft growers. In a second wave in December 2021, the state could issue licenses for 110 stores, 60 craft growers and 60 processors. CLICK HERE TO BE NOTIFIED ABOUT THE NEXT INFORMATIONAL CLASS.
The cannabis industry is one business that owners should consider the C corporation entity structure, especially if the owners are in a tax bracket greater than 24 percent.
Howard Tax Prep LLC helps with choosing the appropriate business structures and facilitates these business formations for you.
We make sure that your organizational documents include methods for removing partners, provisions for tax distributions, and asset distribution at the close of the business.
GAAP Cost Accounting should be used to maximize your deductions. Generally accepted accounting principles, or GAAP, are a set of rules that encompass the details, complexities, and legalities of business and corporate accounting.
Our professionals know how to properly allocate indirect costs to Cost of Goods Sold pursuant to IRC 471, so that your business will be allowed the maximum deductions allowed by law. Proper bookkeeping is the key to lowering your taxable income, which will also lower your taxes.
Thanks to a little-known provision in the tax law known as Section 280E,
you are denied all ordinary and necessary deductions against your marijuana sales income. Section 280E was created during President Ronald Reagan's administration, when in 1981 a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses.
Section 280E applies to you only when your business is “trafficking in controlled substances.”4 A “controlled substance” for purposes of this provision is any substance listed in Schedules I or II of the Controlled Substances Act.
In order to get a cannabis license in Illinois, you must have audited financial statements for the previous fiscal year, which shall include, but are not limited to, an income statement, balance sheet, statement of retained earnings or owners' equity, statement of cash flows, and all notes to those statements and related financial schedules, prepared in accordance with generally accepted accounting principles, with the accompanying independent auditor's report. The audit must be compiled by and certified by an auditor or CPA. Howard Tax Prep LLC can assist you with CPA's that can audit your financial statements.
One of the application requirements for an Illinois cannabis license is the submission of tax returns.
Complete copies of all federal, state and foreign (with translation) tax returns filed by the principal officers of the proposed dispensing organization for the last three years, or for the period each principal officer has filed tax returns if less than three years.
Howard Tax Prep LLC can prepare your personal returns, partnership returns, corporate returns, s-corporation returns, trust returns, and more. Contact us today for more information.
Cannabis business owners face a unique combination of risks that few insurance brokers & insurance companies understand.
Product Liability Insurance can protect producers, processors, packagers, distributors and retailers when they are presented with a third-party claim related to: Inhaled, edible or infused products that caused illness, Bodily injury or property damage caused by product misuse, Manufacturing or product-related defects that result in a loss, Labeling and marketing representations, or Faulty or misused equipment. Speak with one of our knowledgeable cannabis insurance agents today!
QUESTION: I’m considering opening or investing in a cannabis business. Do I get a Section 199A deduction for it? Did tax reform affect the cannabis industry in any other ways?
ANSWER: You won’t get a Section 199A tax deduction for your cannabis business. But some of the other tax reform changes may make the C corporation a more attractive choice of entity.
History of 280E
Congress enacted Section 280E in 1982 at the beginning of the Reagan administration’s “War on Drugs” in response to a Tax Court decision that upheld deductions claimed by a drug dealer for both cost of goods sold and other business expenses.6 The IRS has never issued any regulations or other interpretations of Section 280E. The only guidance on what it means includes a few Tax Court cases (which constitute authority) and a Chief Counsel Advice issued in 2015 (which does not constitute authority).
How does Section 280E hurt state-legal cannabis businesses?
Federal income taxes are calculated using a seemingly simple formula: You take your gross income, deduct business expenses to figure your taxable income, and then pay taxes on this amount. Owners of businesses that don’t involve the sale of Schedule 1 drugs use ordinary general and administrative deductions to maximize their profits, but Cannabis business owners have to pay taxes on gross income.
What types of business expenses are scrutinized under 280E?
• Employee salaries
• Utility costs such as electricity, internet and telephone service
• Health insurance premiums
• Marketing and advertising costs
• Repairs and maintenance
• Rental fees for facilities
• Routine repair and maintenance
• Payments to contractors
EXAMPLE: Let’s say your marijuana dispensary grosses $500,000 per year, with a cost of goods sold of $325,000 and other deductible business expenses of $100,000. If you were a business that sold non schedule 1 products, you would only pay taxes on $75,000. However, as a cannabis business, you will pay taxes on $175,00 because you aren't allowed to deduct general and administrative expenses.
If the business is an S corporation and you are in the 32 percent federal income tax bracket: You’ll pay $56,000 in federal income tax on the taxable net income (32 percent of $175,000). You’ll need to distribute 75 percent of the $75,000 net cash income just to cover the federal income tax bill! Your adjusted gross income increases by $175,000, not only causing you to lose various tax benefits but also subjecting you to additional taxes (such as the net investment income tax).
If the business is a C corporation: Your corporation pays $36,750 in federal income tax on the net income (21 percent of $175,000). Your after-tax profit is $38,250, which you can retain in the C corporation or distribute as a dividend. For every $1,000 you distribute as a dividend, you take a $150 tax hit on your individual tax return.
If the business is a C corporation (continued) If you distribute the entire $38,250, your tax on the dividends would be $5,737 and your total tax would be $42,487 (significantly less than the $56,000 as an S corporation owner).
Your personal Form 1040 adjusted gross income is unaffected by the C corporation’s net income (unless you distribute dividends). The key is that the “phantom” income created by Section 280E doesn’t impact your individual tax return—only the corporation’s.
TIPS TO MAXIMIZE COST OF GOODS SOLD: Consider the following to maximize your cost of goods sold in a marijuana dispensary:
SPACE: If you enlarge the space dedicated to inventory storage, then you will create a larger prorated expense for that space (rent, utilities, etc.) that can be allocated into cost of goods sold.
LABOR: Labor is always a large business expense. With clearly defined job descriptions and detailed hours tracking, you can maximize the amount of employee wages allocated to inventory management (and, thus, deductible as cost of goods sold).
This material is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of these materials do not create an attorney-client relationship between Howard Tax Prep LLC and the user/reader. The opinions expressed in this document are the opinions of the individual author.