Understanding IRC Sec. 280E, COGS, and Cash-Based Business Implications
As an entrepreneur in the cannabis business industry, you may not be aware of the Complications around your tax results. It’s not just Pharmacies that have to worry about taxes, but makers and producers are also subject to taxation. Therefore, it’s crucial to have a good understanding of cannabis business tax liabilities to avoid the consequences of filing wrongly.
Here are the top three things that cannabis business entrepreneurs need to know when it comes to taxes:
Get up to speed with IRC Section 280E.
IRC Section 280E founds the system for cannabis business taxation. This means that the IRS will not allow any debit or credit for payments made during a taxable year for any business involving the dealing of controlled materials. Which is banned by federal law or law of any state in which such trade or business is carried on. This can make calculating tax liability difficult, but entrepreneurs can benefit from tax debits by correctly arranging business costs as Cost of Goods Sold (COGS) under IRC Sec. 471.
Understand what counts as COGS.
The cost of goods sold (COGS) represents the costs required for a business’s operation. This includes the cost of clones and seeds, flower and trim, and the cost of producing cannabis products such as pre-rolls and gummies. Entrepreneurs must be careful in their cost accounting or risk leaving debit on the table or taking wrong deductions, both of which can have serious consequences for the business. The IRS can penalize cannabis business owners up to 20% of overstated claims for taxes, as per rules.
Keep in mind the financial implications of your business.
Cannabis businesses frequently conduct cash transactions due to the nature of the industry. Running a cash-based business, on the other hand, makes it even more critical for owners to record transactions every day and apply a thorough record-keeping program to avoid income differences and potential IRS fines. Cash businesses are also subject to their own set of IRS needs. To officially declare large orders paid in cash exceeding $10,000, businesses must file Form 8300 within 15 days.
Working with an expert accountant in cannabis is highly recommended to direct cannabis business tax liabilities. Accountants assist with bookkeeping, record-keeping, expense classification, and provide guidance on best practices for accuracy. The best way to guarantee that tax liability is exact as well is to make sure COGS are exact. Accounting partners can also assist with the filing process and how to make quarterly estimated tax payments if necessary.
Fortunately, there are resources available to help you find the right tax professional for your needs. Consider using a market like IfindTaxPro, where you can post your project and find the right tax expert for your unique situation. IfindTaxPro’s system assures that clients can find expert professionals who can identify potential opportunities and risks beyond their awareness.
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