Year-end Cannabis Tax Planning: Preparing Your Business for the 2023 Tax Season
CannaBlog by Cory Parnell, CPA, COO of Bridge West
The end of the year is busy for most businesses and individuals, and it can be incredibly hectic for cannabis business owners and operators also. While it’s ideal for cannabis businesses to prepare their books for year-end in the fall proactively, it’s not uncommon for owners and operators to consider tax planning endeavors as the year begins to close.
Whether you have already begun year-end tax planning or you are just getting started, the following tips can help you avoid significant penalties and prepare for 2023.
Engage an experienced cannabis tax professional for a 280E analysis
Section 280E limits cannabis companies from deducting the cost of goods sold. An analysis of 280E can help you maximize legal deductions for all your business activities, especially concerning Code Sec 471c, which was created in 2018.
Perform routine inventory counts
Knowing your inventory at various points in the year and keeping high-quality inventory records is directly correlated to your tax. We recommend that you perform monthly inventory counts and annual counts to keep your records in line. It is also crucial to ensure your count agrees with your state-mandated inventory tracking software.
Minimize year-end inventory to match demand
When a product is sitting in inventory and not flowing through COGS, you’re putting yourself at risk of a much higher tax liability. We recommend minimizing year-end inventory as much as possible to reduce your tax liability, yet still have enough to meet market demand.
Document employee activities in job descriptions
Employees’ activities determine whether their labor is deductible (allocable to COGS) or non-deductible. We recommend documenting labor for all the tasks in your operation and documenting activities in employee job descriptions to support the allocation of labor to deductible COGS.
Review your books and tax returns
Make sure you take the time to review your books and tax return with your experienced cannabis tax professional. Ask questions to make sure either expenses or vendors that may qualify as part of goods sold are not either miscoded or misclassified in selling, general and administrative expenses.
Make sure you are not paying too much in sales tax
In some states, there are sales tax breaks for the purchase of equipment or materials used in agricultural manufacturing activities. Sales tax exemptions may apply to cannabis, but sellers must collect tax unless you present an exemption certificate. If you have paid sales tax for equipment or materials used in agriculture or manufacturing, you may be able to get a refund.
Review entity selection and assets in the entity
You should always discuss entity selection to make sure the current entity makes the most sense for your organization today based on current tax law, court cases, or strategic goals that may have changed. This includes reviewing assets within the entity, which may include intellectual property or real property that you may want to move to a new entity.
Never fall behind on taxes
You need to stay current on all taxes, including excise taxes, income taxes, and payroll taxes. Once you fall behind, it is nearly impossible to get caught up. If you are behind, you need to review your overall business with an experienced cannabis tax professional.
Make sure you file IRS Form 8300 when required
It is essential for cannabis business owners to know about Form 8300. This is an IRS/FinCEN Form that reports cash payments received over $10,000 in a trade or business. The law requires that trades or businesses report transactions via Form 8300 when customers use cash in a single transaction or related transactions over a 12-month period. Make sure you are filing these as the penalty is significant.
Plan on how to remit tax payments
Some states prefer or require taxes to be paid via electronic funds transfers (EFTs), which can be challenging given cannabis-related banking challenges. Planning ahead on how you will pay these taxes is crucial.
Keep good records and proper documentation
One of the issues that we have seen in an IRS audit of a cannabis business is that the operator does not have receipts or support for qualifying expenses. This ends up costing the cannabis company a significant amount in income taxes.
Prepare 1099-Misc or 1099-Int or 1099-OID
Make sure that you prepare 1099-Misc or 1099-Int by the end of January 31. Also, a good practice is to have all vendors provide a new W-9 beginning in January 2023 before making you pay any outstanding invoices. This will help make sure that you have all the correct information to prepare 1099-Misc. Make sure you understand when you are required to issue either a 1099-Int or 1099-OID. If you are not sure, please contact us, and we can guide you through the reporting requirements.
Review your strategic floor plan
Review your business’ floor plan to identify opportunities to deduct rent and other related items under 280E. Cushy offices and lounge areas are nice, but won’t help lower your taxes. Minimize any space not directly related to storing inventory, security, or product handling.
Reconcile all balance sheet accounts
Make sure that you have reconciled all of your balance sheet accounts such as cash, bank accounts, accounts payable, loan balances, payroll taxes payable, accrued payroll, and other liabilities. This needs to be done to make sure you have all of your income and expenses recorded. We have reviewed books where many of these accounts are not reconciled. Business owners assume they are making money when we have closed the books, resulting in an operating loss for the business.